Income Splitting

The main reason we split income is to pay lower overall household tax.  We do this by keeping the tax brackets for each spouse as low as possible.

Here are the types of income that can be split:

1.       Business Income – requires planning

2.        Investment Income – must be planned prior to

3.        RRSP Income – must be planned before contribution

4.        Pension Income

5.        RIFF Income

6.        CPP Income

Remember, it takes early planning to split the income as it usually cannot be done after the year is over.  Seek the help of a professional to ensure that you get the maximum benefits of income splitting!

AUDITS or REASSESMENTS

According to the Income Tax Act, if CRA has not contacted you within 3 years to begin an audit or reassessment process, they cannot do so after 3 years unless you are guilty of filing a false income tax return.

If you do receive any assessment or reassessment, you have 90 days to file a Notice of Objection.

Also, according to the Supreme Court of Canada, CRA cannot try and collect a debt in the case where they contact you after 6 years of incurring of the debt.  This is typical of the majority of debts. 

 

IT’S A MATTER OF INTERPRETATION

It is known that many tax appeals get won by the taxpayer in the Supreme Court of Canada.  This is because majority of the judgments rendered by CRA and the courts comes down to the interpretation of the sections of the Income Tax Act. 

When interpreting the Income Tax Act, it is wise to use precedent setting cases. These are court cases where a ruling has already been given in a specific area of Income Tax Act.  Precedent Setting Cases help judges determine future cases dealing in the same are of the Law or Act. 

GOOD CREDIT VS. SAVING TAX

When doing your tax planning, you must consider your credit. 

For example, if you have too many write-off’s and bring your income low, this will save you tax.  However, it may negatively affect your ability to borrow money.  Tax Credits are most effective in this case as they save you tax without bringing down your income.

As I’ve mentioned before, it is best to seek the help of a professional to make sure that all aspects of your finances are taken into consideration.

TAX PLANNING WITH THE RETIRED

Saving taxes for the retired is one of the best things you can do for the retired to free up cash flow.  Here are some of the key factors you have to look at for your to save on taxes when you are retired:

CPP, OAS and/or other pensions:  Pension income can be split to lower the couple’s overall taxes paid. You can split pensions and CPP but not OAS.

RRIF (Registered Retirement Income Fund):  RIFFs are treated as pensions in that they can be split between spouses.  Currently, RRIFs have a mandatory annual withdrawal with tax consequences. 

CLAWED BACK OAS:  If you, as a retiree, make too much income, CRA will claw back some of your OAS.  The higher the income, the more that is clawed back.

INVESTMENTS MADE THROUGH CORPORATIONS AND TRUSTS:  If you don’t need the income, investing through corporations and trusts is a way to avoid the personal tax and claw back consequences.

TAXES UPON DEATH:  The biggest tax consequence for a retiree is taxes upon death.  Tax planning for taxes upon death is part of an estate plan.

TAX PLANNING FOR THE INVESTOR

Investments are usually found in 3 asset classes:  Real Estate, Paper and Business.  Each class has different tax considerations:

• REAL ESTATE:  Usually income will be rental income (similar to business income) or Capital Gains.  Remember only 50% of Capital Gains are taxed.  The Capital Gain of selling your Personal Residence is exempt from taxes. 
• PAPER:  Usually paper investments such as bonds and other notes produce interest income.  Interest income is taxed at the highest rate of all investment income.  It is important to ensure that you are making a good rate of return on interest to make the after tax amounts worth it.
• BUSINESS:  Usually business investment is in the form of Dividends and Capital Gains such as stocks purchased in a public company.  Both Dividends and Capital Gains have preferential tax treatment. 

MAINTAINING YOUR BUSINESS

Here are other key aspects that all business owners should look at:

Ø        Bookkeeping.  Bookkeeping must be done regularly to make sure that all finances of the business are monitored.

Ø        GST remitting.  GST is required for a business when the business’ gross income is over $30,000, whether the business is a sole proprietorship or a corporation.  GST can be remitted annually, quarterly or monthly.  This must be decided when you first apply for the GST number.  The GST owing is simply calculated by the GST collected minus the GST paid on expenses.

Ø        Payroll remitting.  Payroll is remitted monthly, specifically on the 15^th of the following month.  Payroll remittances consist of Federal and Provincial taxes withheld from the employees, CPP and EI both the  employee and employer portion.

Ø        Corporate Year Ends.  Corporations get to pick which month they’d want for their year end.  It is good to pick a month that works for the owner, and is best for deferring tax. Corporate Year Ends consist of:

o         Bookkeeping Review

o         Year End Adjustments

o         Supporting Schedules

o         Financial Statements

o         Federal Corporate Income Tax Return

o         Provincial Corporate Income Tax Return

o         Annual Resolutions (Minutes)

INCORPORATION 101

When incorporating, make sure that you get a minute book, not just a Certificate of Incorporation and Articles.  Corporations must keep minutes of all major decisions that shareholders, directors and officers make.  Shareholders are the owners of the Corporation, and they appoint directors to make the decisions for the Corporation.  Directors appoint Officers to manage the day to day operations of the Corporation.  The appointment of each of these as well as issuance of shares must be recorded in the minute book from the beginning, along with other decisions such as the address, bank and accountant of the Corporation.

Once a corporation is set up, an annual return must be filed every year with the provincial government.  This is a small cost, but must be done every year or the Corporation will be dissolved.  Annual returns must not be confused with Corporate Tax Returns.

Another key factor in setting up a corporation is getting a Business Number.  All Corporations require a Business Number.  A Business Number (BN) is simply a numbering system used by the CRA to track your business.  It is based on the idea of one business, one number.  The BN consists of two parts – the Business Number and the account identifier.  The entire number has 15 characters – 9 digits to identify the business and 2 letters and 4 digits to identify each account a business may have. Not all Sole Proprietorships require a business numbers.  Only those who need to collect GST, have a payroll, or import and export need a Business Number.

STRUCTURING FOR THE SELF-EMPLOYED and BUSINESS OWNER

Before starting a business, it is necessary to structure it properly.  Here are the main ways a business can be structures:

·          SOLE PROPRIETORSHIP.  This is a type of business entity which legally is not separate from its owner.  Taxes for this type of business are paid on the individual’s personal income tax return.  The sole proprietorship is good to use for smaller home-based businesses or businesses that are unsure if they will make over $35,000.

·          CORPORATION.  A corporation is a legal entity used to conduct business.  Corporations exist as a product of corporate law and their rules balance the interests of the shareholders and the employees.  This type of business pay a lower tax rate than most individuals.

·          HOLDING COMPANY.  A holding company is a company that owns part, or all majority of other companies’ shares.  It usually refers to a company which does not produce the goods or services itself,  Holding companies allow the reduction of risk for the owners and can allow the ownership and control of a number of different companies.

·          INTERNATIONAL BUSINESS CORPORATION. This is an offshore company formed under the laws of some jurisdictions as a tax-free company which is not permitted to engage in business within the jurisdiction it is incorporated. 

·          TRUST. A trust is an arrangement whereby property is managed by one person for the benefit of another.

·          LIMITED PARTNERSHIPS. This is a form of partnership that has both a General Partner who runs the business and Limited Partners who put in the capital. 

Proper structuring is your first step to building a successful business so make sure you consult with a professional on which structure bests fit your business and personal goals. 

TAX PLANNING WITH THE SELF-EMPLOYED OR BUSINESS OWNER

Self-employed people or business owners have a great edge in tax planning over the employed.  They get to deduct expenses from their income and pay less tax later, whereas the employed do not get to deduct expenses from their income and have to pay tax on every pay cheque.

Here are the many ways for the self-employed and business owner to save on tax:

• Structuring
• Deducting business expenses
• Use dividends
• Make spouses and dependents over 18 shareholders of the corporation
• Pay family members wages
• Utilize shareholder loans
• Utilize Private Health Service Plans (PHSPs)
• Always stay under the “Small Business Deduction Limit”

I’ll be writing more about these tax saving strategies for the self-employed and business owners in my next blogs.  Check back here next week!

« Previous Page — Next Page »