Additional Tax Planning Strategies
An EPSP can be utlilized by corporations with one of the benefits being a postponement of source deductions payable on a year end tax planning bonus.
With the recently reduced corporate income tax rates, this vehicle receives less attention than in the past.
When an EPSP is implemented, the normal 180 days rule for bonus payouts can be increased, sometimes by as much as 13 months. This allows the corporation to hold the additional payroll source remittance funds and earn interest on these amounts. In addition, it postpones the required date for final determination of who the amounts will be paid out to, thereby increasing flexibility.
An RCA is a special trust account which is created to hold funds earmarked for the retirement of key management personnel. These funds are held in a special account in much the same way as RRSP funds would be. No income is reported by the individual taxpayer until the funds are finally paid out of the RCA to the individual. If structured properly, payments into the RCA are tax deductible by the payor corporation. Tax rates of approx. 50% are initially paid by the RCA and the after tax funds are invested inside the RCA. In certain cases, the income will be taxed in the hands of the individual at tax rates much lower than normal. This can occur where the individuals taxable income drops as a result of retirement, or where the individual becomes resident for tax purposes in a different province or a different country.
CDA's can be used by business owners to convert retained earnings or capital gains to tax free payments by the corporation to the individual shareholders. These plans are often based on specialized life insurance policies which are owned by the corporations.
In certain circumstances it can be prudent to creditor proof your company. The basic concept is to protect your current and future corporate retained earnings from future creditors. While nothing can be done regarding current creditors, it may be possible to protect a large portion of your companies value from future claims and lawsuits with the use of properly setup holding companies.
In certain circumstances it may be reasonable to utilize more than a single corporate small business tax deduction or to have a spouse or other relative participate in income from a company. In theses cases, it is possible that substantial tax savings may also be experienced as a result of such splitting of income and additional small business tax rates .
This solution often requires two distinct business units and the use of a partnership.
In certain circumstances an individual who owns shares of an active business in Canada may be able to obtain a $750,000 CGD on the sale of those shares. This tax deduction can be crystallized or "locked in" to ensure that the shareholder is able to take advantage of this tax opportunity in the event of a future sale. A crystallization of the CGD in any given year normally sees the individual reporting a gain of $750,000 without paying any income tax on this amount. One of the requirements to qualify is that the shares sold are "qualifying small business shares".
Certain individual investors and finding success with Flow Through Shares and Income Trusts. Typically these investments are Real Estate based or are involved with Mining and Oil and Gas investments. These investments can produce very substantial tax deductions and tax credits on personal income tax filings.
IPP's can be utilized by business owners to provide an alternative to RRSP contributions. In many cases, IPP contributions can be substantially higher than RRSP contributions - sometimes more than double the amount [For 2004 the maximum RRSP contribution is $15,500]. The terms of an IPP plan are definitely less flexible than an RRSP however many business owners have found that the benefits associated with these plans far outweigh the associated costs and limitations.
Like the EPSP's above, with the recently reduced corporate income tax rates, this vehicle receives less attention than in the past.
Family trusts can be excellent estate planning tools - they can assist business owners with achieving their estate objectives in a controlled manner and can also produce overall income tax savings. Family trusts can also be used to allow minor children to participate in the $750,000 capital gains deduction [see item #6 above].
Other idea's which may represent opportunities for business owners include:
The above information is general in nature. Please ensure that you contact Canham Rogers, Chartered Accountants to discuss any specific transactions prior to implementation. We would be pleased to assist you in these and other area’s of your business.