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Tax Planning Strategies – Part I (April 10, 2015)
As part of our year end process, we review your current situation to determine what tax planning strategies are appropriate for you. I have included some examples below.
Companies pay a flat rate of tax on their income – 15.5% of the first $500,000 of income after expenses.
When a business owner withdraws funds from their company, they pay personal tax at a rate that ranges from 0% to 32%. The rate depends on how much is withdrawn and your other income.
For example, assume the company makes a $100,000 profit. The company would pay tax of $15,500. If the owner withdrew all the funds, the owner would pay personal tax of $10,320. The combined tax rate is 26%.
Strategy # 1 – If you do not need the funds personally, leave them in the company. This defers the personal tax until the funds are withdrawn. Companies can open an investment account with their broker.
Strategy # 2 – Your personal tax rate increases as your income increases, therefore avoid large lump sum withdrawals from your company. Planning these withdrawals over two or more years could save you 10% to 20% in tax.
Tax Planning Strategies – Part II (May 10, 2015)
Business owners can withdraw funds from their company either as a salary or a dividend, or a combination of both. Amounts can change every year.
A salary is required if you want to contribute to CPP, or if you have child care or moving expenses. Source deductions (CPP/EI/Tax) must be made monthly to CRA.
A dividend can only be paid to a shareholder. There are no source deductions required, so you will pay any tax owing when you file your return (we will estimate what this amount will be).
Strategy # 1 – Use a combination of salary and dividends to equalize the family income. Two taxpayers earning $50,000 each will pay significantly less tax than a single taxpayer earning $100,000.
Strategy # 2 – As most small business owners do not have a pension plan, pay a salary so you will be entitled to collect future CPP benefits. For 2015, a salary of $53,600 will provide you with the maximum CPP benefit. CPP also includes a disability plan.
Strategy # 3 – Companies with Ontario wages over $450,000 per year must pay an employer health tax of 1.95%. By minimizing salaries, this 1.95% tax can be reduced or avoided.
Strategy # 4 – Taxpayers over age 60 with a long history of CPP contributions may not benefit from making future CPP contribution. CPP contributions are not required if no salary is paid.
Resources:
Personal Tax Rates
