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Small business tax
minimization strategies


By Allan Morse


As an owner-manager of an incorporated business, you have several opportunities to minimize taxes. Following are just a few of the strategies that can potentially reduce your tax bill.


Minimize taxes with your family

Employ lower-income family members and pay them a salary that is reasonable based on the services they are performing. The income received by the family member will be taxed at a lower rate.

Pay dividends from corporate earnings to spouses and adult children shareholders. Canadian dividends are taxed lower than salary income (however they will not create RSP contribution room or CPP/QPP pensionable earnings). Dividends paid out to benefit related minor children are taxed at the highest marginal tax rate under the “kiddie tax” rules.

Loan corporate funds to adult children for education costs. The loan is considered taxable income to the adult child, however the tax payable on this income may be very low or even nil due to the child’s basic, tuition and education tax credits. When the adult child repays the loan to the corporation in a future year when the adult child is working and earning income, the adult child will receive a personal tax deduction.

Consider an “estate freeze” so that the capital gain on the future growth of your business is deferred and attributed to the next generation, but control of the business remains with you.

 

Reduce taxes while planning for retirement

Set up a Retirement Compensation Arrangement or Individual Pension Plan to increase your retirement savings, while lowering your corporation’s tax burden.

Use corporate funds to make contributions to your Retirement Savings Plan (RSP). The cash used to make the RSP contribution will be considered employment income (reported on the T4 and thus will create future RSP contribution room) but the offsetting RSP deduction will avoid taxation on the increased salary.



Use insurance to shelter tax

Corporate-owned life insurance can help fund tax liabilities and shelter tax on surplus investment income.

 

Purchase investments to reduce taxes

If there is an impending Capital Tax liability, consider purchasing eligible investments to reduce the Capital Tax liability (investment merits and after-tax investment returns must be considered).

 

This article is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy.

Allan Morse is a Senior Investment Advisor with RBC Dominion Securities in Charlottetown, PEI. Over his career he has focused on the importance of financial planning which he feels helps clients set clear, attainable goals. If you have any suggestions regarding this article or any issue regarding financial or investment planning, please call him direct at 1-800-463-5544..

You can Email Allan here.