Here is a short checklist of tax planning and wealth
management ideas all entrepreneurs should consider regardless of the life phase
of their business:
1. Identify and implement income deferral
opportunities.
Do you need all of the income your
business currently generates to cover your expenses? If not, have you incorporated your business? If
you have incorporated your business, have you incorporated a separate corporation
which is used solely for investing purposes?
Depending on your circumstances, with the correct corporate structure
you may be able to defer a significant amount of income tax each year leaving
you with more money to invest.
2. Plan for the sale of your business.
Whether you want to sell you business
in the next couple of years or 20 years from now, the sooner you start planning
for it, the greater the opportunity you will have to reduce or eliminate the potential
income taxes on a sale. Did you know
that each shareholder of an incorporated business can generate tax savings of almost
$200,000 when a business is sold? If the share ownership of a business is
ideally structured, one may be able to sell a business and pay little or even
no income tax.
3. Identify income splitting opportunities.
There are bona fide techniques accepted by the Canada Revenue Agency that
provide the opportunity for individuals to split income. Have you ever thought about loaning your
spouse or child money to invest? These
prescribed rate loans can be set up with interest rates as low as 1% and they allow
your spouse or child to earn investment income that otherwise would have been
taxed in your hands. Also, if you have a
child who is attending university or college, you can pay him or her upwards of
$50,000 from your business with little or no tax.
4. Use an integrated approach to your finances
with a single professional taking the reins.
When your professional advisors
(e.g. accountant, lawyer, investment advisor, insurance broker, banker, etc.)
do not consult with each other, there are often negative consequences including
tax inefficiencies, duplication of services and issues that are not addressed
in a timely manner.
Often your trusted accountant acts
as the “cog” in your “wheel of wealth”. An
accountant can develop an overall financial plan that integrates all the
financial aspects of your life and organizes all your advisors into a cohesive
financial unit. This professional can:
·
review your investment statements and discuss
them with your investment advisor to ensure your investments are aligned with
your objectives;
·
discuss various income tax minimization
strategies with your investment advisor so that you are not paying any unnecessary
taxes;
·
review your insurance policies and discuss your
coverage with your broker to determine whether there may be duplication or
areas of exposure;
·
consult with your lawyer to ensure that your
wills are properly drafted to reflect your particular situation.
This approach has been very
refreshing for our wealth management clients.
5. Ensure your interest is tax deductible.
Interest can be tax deductible or non-tax deductible. The former will reduce your taxes, the latter
will simply reduce your bank account. There
are ways to take non-deductible interest, such as interest on your mortgage,
and convert it to deductible interest.
In order for interest to be deductible, the loan obtained must be used
for an income earning purpose. So, for
example, if you hold investments personally and you also have a mortgage,
consider selling the investments, using the funds to pay down your mortgage,
re-obtaining the mortgage and using the money to re-acquire the investments. By arranging the mortgage in this manner, the
interest incurred on the mortgage will be deductible for income tax
purposes. You can also obtain a
corporate loan and use the funds to pay back a shareholder loan or pay out
retained earnings or capital. The interest
on these loans would be deductible for tax purposes.
While these concepts should be considered by the
entrepreneur, each person’s circumstances and situation is unique and therefore
should be discussed with your professional advisor before being implemented.
Aaron
Schechter, CPA, CA, is a Taxation Partner with Cunningham LLP, Chartered
Professional Accountants and can be reached at aaron@cunninghamca.com or: 416-496-1051x309.
www.cunninghamca.com
