Building a business is tough, it takes time and patience and a lot of strategy. With the future Income Tax hikes planned by the Liberal Government your Tax strategy might need to be refined. How do you take the money out of your business without being taxed heavily?
Incorporating a business offers benefits and really does help soften the blow considering the small business deduction for the first $500,000 of your active income is taxed at 15.5%. The rest of the money sitting in your bank account will only be taxed when you withdraw it as a dividend that’s when you get hit with the personal tax #Yikes. However thankfully the small business deduction was spared during the Liberal Federal budget. Close call though since Justin Trudeau has ‘promised’ to increase taxes on the wealthiest of Canadians. #TaxManGrins
Keeping the money inside the corporation is a tax deferral strategy where you defer the personal tax hit to be paid at a later date. You can always use an income splitting strategy which is paying dividends to family members who are in a lower personal tax bracket. Your kids are quite useful #TrustMe so spread the love. New PlayStation Jimmy? No problem! The main reason why a business owner would use a tax deferral or an income splitting strategy is to well…lower the taxes #CaptainObvious and because the Marginal tax rate in Ontario for income over $220,000 is 53.5% (2016 rates).
Now keeping money inside your corporation indefinitely is not feasible #iWish because business people also have cash needs, mortgages to pay, clothes to buy, food, vacations etc. You need to determine what your “cash need” will be and plan accordingly. Considering the low rate of interest given today it might make more sense to carry debt and avoid accelerating the paydown of debt through corporate withdrawals. You can withdrawal these funds sitting in your bank account at a later date maybe during retirement when your tax bracket is ‘likely’ to be lower. That new Tesla you been eyeing well, better to buy a nice car and drive it than to be taxed right? ($800 a month write-off limit by the way).
The key take away message is if you’re earning income that you don’t need to live on then its best to keep it in the business. You can re-invest it in the business and if your business doesn’t need that high capital then re-invest into other securities or alternatively into a life insurance policy. This life insurance policy is super useful when the business owner passes away the money paid out through the Capital Dividend Account (CDA) is usually tax free to the beneficiaries. So plan for the future? It’s critical you do and avoid the “Death Tax”.
Hope you gained some Taxvantage from this blog! It’s in your best interest to hire the right accountant who will create you the right strategy which will save you just the right amount of tax right? #KaChing
Contact your Accountants today click on this link —> https://capexcpa.com/contact
- The Capex Team