All of the speculation and discussion has turned into reality — the federal government is beginning to clamp down on tax-reduction opportunities for small businesses. With the new restrictions, it becomes even more important to take advantage of the tax breaks that remain. Here are three strategies to consider.
Hiring a family member is an effective way to extract funds from the company to be taxed in a lower bracket. The salary qualifies as a deductible business expense and your family member pays no tax on the first $11,809, thanks to the 2018 personal amount. In addition, the salary earned generates Registered Retirement Savings Plan (RRSP) contribution room and contributions to the Canada/Quebec Pension Plan (CPP/QPP) for your spouse or child.
Note, however, that the arrangement has to be legitimate. The company must be in need of the position, your family member must be capable of performing the job, and the salary must be reasonable for the work performed.
As a business owner, you can choose to take compensation from the business as salary, which is fully taxable, or dividends, which qualify for the dividend tax credit. Determining the combination that is most tax-efficient can be complex.
There are many variables to take into consideration, including your corporate income level and your need for cash flow. You may want to engage an accountant or tax expert to help you compare scenarios.
There’s an additional complication in that only salary qualifies as earned income for RRSP purposes. Many owners choose to draw enough salary to contribute the maximum to their RRSP every year. Salary also enables the owner to pay into CPP/QPP.
Here’s a strategy where the tax break goes to your child. According to the Income Tax Act, a child is considered “connected” to the business owner and therefore can receive a shareholder loan from the corporation. In this case, a child of majority age who’s in school receives a shareholder loan to help cover education costs.
The loan is taxable income but can be offset by the child’s basic personal amount and education tax credits. In most cases, there is likely to be little or no tax payable. When the child pays back the loan, she or he claims a personal tax deduction for the amount repaid.
Talk to us if you’d like to know more about these or other tax-management strategies. Before implementing any strategy, it’s advisable to review it with a qualified tax professional for guidance with regard to your specific business and situation.