Tax talk or how to minimize taxes for the self employed l.jpg
This presentation is the property of its rightful owner.
1 / 36

“Tax Talk” Or How to Minimize Taxes for The Self-Employed PowerPoint PPT Presentation

“Tax Talk” Or How to Minimize Taxes for The Self-Employed By Leslie Slater, CA, MBA Topics to Be Covered Similarities and Differences between incorporated businesses, and unincorporated Income taxes Ownership structures Paying yourself Paying family members Taxation of profits

Related searches for “Tax Talk” Or How to Minimize Taxes for The Self-Employed

Download Presentation

“Tax Talk” Or How to Minimize Taxes for The Self-Employed

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript

Tax talk or how to minimize taxes for the self employed l.jpg

“Tax Talk” Or How to Minimize Taxes for The Self-Employed

By Leslie Slater, CA, MBA

Topics to be covered l.jpg

Topics to Be Covered

  • Similarities and Differences between incorporated businesses, and unincorporated

    • Income taxes

    • Ownership structures

    • Paying yourself

    • Paying family members

    • Taxation of profits

More topics l.jpg

More Topics

  • Expenses of car, home office, meals and entertainment, travel, etc.

  • Health Spending accounts

  • IPP’s


  • SRED and other government programs

Final topics l.jpg

Final Topics

  • Salary/Dividend Decision

  • New Dividend Tax Credits

  • Should you incorporate?

  • Your employees – how can you help them and yourself

Incorporated companies l.jpg

Incorporated Companies

  • Separation between you and your company

  • Ownership can be you, other business partners, your spouse, adult kids, a family trust, other corporations

  • Corporation pay its own federal and provincial taxes separate from you

  • You are paid salary/bonuses & dividends

How are you really paid l.jpg

How are you really paid?

  • If draws due to inconsistent cash-flow, then need to either show self-employment income or dividends

  • Don’t want it to be a series of loans and repayments

  • Company then doesn’t pay employer CPP

  • Shareholder loans/draws need to be zero at end of your fiscal year

Important tax rates l.jpg

Important Tax Rates

  • CCPC are charged 18.6% in Ontario on first $300k of active business income – then pay dividends after corp tax

  • Increasing to $400k January 1, 2007

  • Ontario lowered rates on $400k so there is a another tax bracket – 26.3%

  • Over $400k, pay 36.1%-40.8% on ABI

New dividend tax credit l.jpg

New Dividend Tax Credit

  • For dividends paid out of earnings not subject to federal small business rates or investment income (after Jan 1, 2006)

  • So not relevant to the salary/dividend decision below $300k (moving to $400k)

Salary versus dividends l.jpg

Salary versus Dividends

  • At all levels of corporate income, there is deferral of taxes for income left in the company and invested since corp rates are less than personal rates

  • But will pay high taxes on the investment income unless pay it out to shareholders

  • Ultimately about 3% less taxes by paying dividends versus salary

  • And salary attracts CPP, EHT

So how do i make the decision l.jpg

So how do I make the decision?

  • Generally bonus down to SBD until 2010 when rate changes may make you neutral

  • Below SBD, pay dividends unless you are already below SBD before start

  • If below $300k when you start, do you pay dividends or salary?

Salary dividends or leave it in l.jpg

Salary, dividends or leave it in?

  • Salary is

    • earned income for RRSP,

    • subject to CPP,

    • part of EHT calculation on total payroll

    • Considered for debt servicing levels

    • So generally pay tax until reach levels for desired RRSP and debt servicing

    • Max 2006 $106k x 18% = 19,000 if desired

Leave it in l.jpg

Leave it In?

  • Tax deferral –i.e. no personal taxes yet

  • But need to watch how big your investment assets get – 50% of assets for 2 year, 90%

  • Income on investments taxed at high rates if not needed during business cycle

  • Refundable taxes if pay out dividends ($1:$3 ratio)

So the decision l.jpg

So The Decision

  • Leave cash in the business if

    • don’t plan to sell within 2 years,

    • below the $300k (soon 400k) and

    • you are at your desired earned income levels

    • but watch you don’t build up too much

    • Have income split to lower tax brackets with family members

Income splitting with family l.jpg

Income Splitting with Family

  • Can pay high reasonable amount for work done

  • Have to actually pay them; and get invoices if they are contractors

  • Spouses can be partners or shareholders

  • Family Trusts can be partners or shareholders

Income splitting cont d l.jpg

Income Splitting Cont’d

  • Sole proprietorship – pay for work done

  • Partners – + allocate partnership profits

  • Shareholders – dividends (but not to minor children), duplicate capital gains exemption if sell shares (but need to pay them)

  • Many considering everyone in a family trust for maximum discretion on allocations

Similarities between corp other l.jpg

Similarities between Corp & Other

  • Paying family members for work done

  • Home office as principal place of business

  • Meals and entertainment

  • Travel

  • GST, PST

Differences l.jpg


  • Car

  • Paying family owners

  • Health spending accounts vs group medical

  • CPP

  • SRED and other government programs

  • IPP’s

Home office l.jpg

Home Office

  • Principal place of business; all costs (except mtg princ) x sqft/sqft or #rooms

  • Consider market rates to charge incorp co

  • Rental income on your personal tax return

  • Lease with company

  • If not princ. place, then regularly and continuously meet clients there and exclusive business use (court cases)

Meals and entertainment l.jpg

Meals and Entertainment

  • 50% deductible by company or self-employed

  • 50% for GST Input tax credits

  • Keep track of who you entertained on the receipt to show business purpose

  • Don’t want to be shareholder appropriations if incorp; double taxation

Slide20 l.jpg


  • Need to register where >30k last 4 quarters

  • Start usually as annual filer and remitter

  • Move to quarterly remitter or filer based on first year

  • If have a refund always (e.g. US sales and Cdn costs), then want frequent filing

  • CRA doesn’t like sending big refunds

Gst cont d l.jpg

GST cont’d

  • Value added tax – difference between amount charged and amount paid

  • Have to keep track to both unless use other method

  • Quick method – $200k limit

  • 6% as of July 1, 2006 changed rates for calculations

Gst over the internet l.jpg

GST over the Internet

  • If US resident – zero-rated but you have to have declaration from them

  • What are you selling – an intangible or a service (software can be either)

  • If wholly outside Cda, not required on service

  • If intangible with right to use in Cda - GST

Slide23 l.jpg


  • Sales tax, not value added tax

  • Consider all items that go into your product

    • E.g. software companies might provide owners with CD’s, paper manuals, use development computers and can buy these without PST

Pst over internet l.jpg

PST over Internet

  • How and where delivered

  • If delivered electronically, servers outside Ontario and can’t download in Ontario, then no PST

  • If can download in Ontario, then PST

  • If delivered in other provinces, may have HST (BC based on if you do direct advertising)

  • Complicated so check it out

Slide25 l.jpg


  • If self-employed, write-off the business proportion of all your auto costs (s/t max $800/mo, 30k cost)

  • If corporation, then difference if company owned or leased (taxable benefit) versus personally owned or leased

  • If personally owned or leased, can charge company .50/km first 5,000 and $.44/km over and no taxable benefit or chg allowance (taxable income)

Health spending accounts l.jpg

Health Spending Accounts

  • Health Spending Accounts only available to corporations

  • You make a contract with your company to cover list of medical expenses and put a set monthly amount in separate bank account each month until employee submits the medical expenses and gets reimbursed

  • Account is not considered part of company books

Health spending cont d l.jpg

Health Spending (cont’d)

  • No maximum, but should do set monthly amount

  • Unlike group premiums for self-employed where get to deduct $1,500 for self, $1,500 for spouse and $750 each dependent child from business income (not incl life, ltd)

  • Need to establish for all employees

  • Monthly amounts are deductible to co; not taxable benefit to employee

Slide28 l.jpg


  • If incorporated, then company pays employer portion of CPP

  • Self-employed pay both sides when file their personal tax returns – 9.9% of 42,100, max $3,821 in 2006

  • If within 15 years of retirement, want to ensure that you are maximizing your CPP contributions

  • Can receive as early as 60 (reduced); normal 65

Slide29 l.jpg


  • SRED is Scientific Research and Experimental Development

  • Only available to corporations

  • Important cash incentive to software companies & manufacturers in Cda where contribute to tech advancement and where there was tech uncertainty

  • Pays $ even if don’t pay any income tax

  • Approved SRED can be collateral for bank loan

Other government programs l.jpg

Other Government Programs

  • Mainly focused on corporations

  • Some provide cash even if no taxes, some match funds (e.g. IRAP) and some provide income tax credits against taxes payable

  • Ontario has some focused on media

  • Also, there are government funds looking to encourage innovation

Ipp individual pension plan l.jpg

IPP (Individual Pension Plan)

  • Can define a smaller group (you, your partners, but not general employees) to be covered

  • Corporation - need employee relationship

  • IPP’s useful to accumulate larger amts than RRSP’s, get company deduction, if around 50, steady corp. cash-flow, and have been running the corp. for a number of years

  • Companies will calculate benefit and consult for free; set up costs coming down

So should you incorporate l.jpg

So Should You Incorporate?

  • If you make more money than you need or want to live on – yes, tax deferral at least

  • If there is liability risk – yes, corporate veil

  • If there are contracts which are not assignable

  • If you have income splitting opportunities with spouse and/or children

Incorporation advantages l.jpg

Incorporation Advantages

  • If you think you qualify for SRED or other government programs

  • If you think you’ll be in business for a while and ultimately sell – capital gains exemption

  • If you might want do retirement planning (IPP’s) or health spending accounts

But what about your employees l.jpg

But what about your employees?

  • How can you help them to minimize their taxes?

  • Specify in employment contract that they need home office (e.g. technology workers) with internet connection, cellphone, and personal computer; car also

  • Give them a T2200 to write off these against their employment income

Other ideas for your employees l.jpg

Other Ideas for Your Employees?

  • If they negotiate contracts, pay some of remuneration as commission and specify as such on T4 slip

  • Commissioned employees have more write-offs than salaried – even their fees for income tax preparation

  • If they pay part of their benefits, specify it covers the life and long term disability part

To conclude l.jpg

To Conclude

  • When you start a business, you may not incorporate, so you can write-off losses against your personal income…but if the business is going to continue, it usually makes sense to incorporate

  • There are more opportunities for tax deferral, income splitting, estate planning, health care deductions, retirement planning, etc.

  • So make sure you are getting all the possible advantages

  • Login