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“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

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tax talk or how to minimize taxes for the self employed

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

By Leslie Slater, CA, MBA

topics to be covered
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
More Topics
  • Expenses of car, home office, meals and entertainment, travel, etc.
  • Health Spending accounts
  • IPP’s
  • SRED and other government programs
final topics
Final Topics
  • Salary/Dividend Decision
  • New Dividend Tax Credits
  • Should you incorporate?
  • Your employees – how can you help them and yourself
incorporated companies
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
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
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
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
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
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
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
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
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
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
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
Similarities between Corp & Other
  • Paying family members for work done
  • Home office as principal place of business
  • Meals and entertainment
  • Travel
  • GST, PST
  • Car
  • Paying family owners
  • Health spending accounts vs group medical
  • CPP
  • SRED and other government programs
  • IPP’s
home office
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
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
  • 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
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
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
  • 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
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
  • 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
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
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
  • 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
  • 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
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
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
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
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
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
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
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