This week’s federal government budget illustrated that the federal government may be easing off its assault on small business owners. They are moving forward with the proposal to eliminate the tax on split income (TOSI) for dividends paid to non-participating family members within a business. They have eased off on the passive investment income that a business owner can keep within his/her business provided the investment income doesn’t represent more than $50,000 worth of income. But the question remains, ” how do you pay less tax through your business?”
What last year’s July 17th proposal showed business owners was the current federal government will stop at nothing to squash the entrepreneurial spirit in Canada and completely dismiss the rationale for going into business for yourself in the first place.
Today, the obvious questions I’m asked by business owners, “what are the tax-advantaged ways of getting money out of my business?” The following are 10 opportunities still available to business owners:
- Fund a Personal Pension Plan (PPP) through your business: As a business owner you have the ability to fund a PPP through your business. This is considered a 100% expense to the business. Although it is a tax-deferral, the contribution in a PPP can represent a significant amount more than an RRSP. Read more
- Retirement Compensation Arrangement (RCA): Is an arrangement entered into between an employer and employee (in this case the business owner). Half the RCA goes into a self-directed Investment Account and half goes into a Deferred Tax Account. This is a tax-deferral strategy and is 100% expense to the business. Read more
- Enter into a Split Dollar Critical Illness Arrangement: Many business owners have Critical Illness insurance on themselves. Having a split dollar critical illness strategy (Critical Illness paid by corporation, Return of Premium is paid personally by the owner) can pay the entire premium back to the owner personally if a claim is never made. This could represent a handsome sum if the owner remains healthy. Read more
- Corporate Insured Retirement Plan (CIRP): Many business owners understand the value of corporately owned permanent life insurance. The cash value grows tax-free while within an insurance policy. Over a number of years, the cash value that can accumulate can be significant. Accessing this cash by the business owner can be tricky and requires leveraging a mechanism called a Guaranteed Fee Arrangement. Read more
- Insured Retirement Plan (IRP): The difference between a CIRP and an IRP is the ownership and beneficiary of the policy. Whereas a CIRP is corporately owned, an IRP is individually owned. An IRP is paid for in after-tax dollars whereas a CIRP is paid for with retained earning from the business. Both take advantage that cash value grows tax free in an insurance policy. How you access this cash value requires careful consideration and otherwise can trigger significant consequences. Read more
- Leveraging the Lifetime Capital Gain Exception (LCGE) when Selling your Business: If you are able to sell your business, if you qualify, you may leverage the LCGE. The LCGE for 2018 is $848,000 if you qualify for the entire amount. It’s important to understand what the qualifying criteria for the LCGE. Read more
- Reimbursement of all your family’s healthcare and dental expenses: If you’re the owner of an incorporated business, you are eligible to remit all your family’s CRA-approved health and dental expenses. This is 100% business expense and a non-taxable benefit to the business owner. The caveat being the expenses need to qualify, be adjudicated by a third party provider and be fair and reasonable in nature. Read more
- Repayment of Shareholder Loans: If you’ve loaned money to your corporation, you can take repayment of that loan with no tax implications, so consider taking repayment to meet your cash needs. Self-funding or “bootstrap funding” is a common practice for start-up businesses.
- Pay Capital Dividends: Your corporation has something called a “capital dividend account” (CDA). It’s an account on paper only, and is generally made up of the tax-free portion of any capital gains realized by your corporation over time, any capital dividends received by your corporation, and the value of most life insurance proceeds paid into the corporation.1
- Withdraw your Paid-up Capital: The shares you own in your corporation have a “paid-up capital” (PUC) amount, which is a sort of cousin to the adjusted cost base of your shares. The PUC is the amount you’re able to extract on a tax-free basis from the corporation, and most often is the amount you paid for your shares. There are different ways to go about withdrawing your PUC (redeeming shares with PUC is one option) so be sure to speak to a tax pro first.2
Although there are no such things as “free money”, there are strategies that will allow you to tax defer. More importantly this can give you a vehicle to get money out of your corporation and into your hands personally. This can have other advantages to a business owner; creditor protection, leveraging the cost of capital and capital preservation. The key is to undertake these strategies in advance, as with most things, time can work in your favour.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolved from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.