Last month reminders!

There are only a few weeks remaining this 2009.  This means that we don’t have much time to take full advantage of our tax credits and deductions! It is time that you reviewed your finances to make everything count!

As you review your financial transactions for this year, make sure you get professional help with your tax planning to ensure that you are on the right track.  As I mentioned before, tax planning is a very important tool for every Canadian.  Proper implementation of a tax plan helps ensure that you get the full advantage of your tax credits and deductions and ultimately save you more taxes at the end of the day. 

For more information on tax planning,  please contact me through the ask the guru section or through my email — info@kustomdesign.ca

One more thing . . .   my next few blogs will focus on some important information regarding tax credits.  These are reminders for you to make sure you maximize these benefits for the 2009 tax year!

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 TIPS FOR INVESTORS

These are some helpful tips for investors on managing their tax transactions:

INTEREST & CARRYING CHARGES:  Whenever money is borrowed to invest, in anything other than your personal residence or an RRSP, it is tax deductible.

FOREIGN INVESTMENT INCOME:  Most income from investments that you own personally is taxable, whether it is domestic or foreign. 

PURCHASING INVESTMENTS PERSONALLY VS CORPORATELY:  Investments held in a corporation are considered passive income, unless investing is the main line of business of the Corporation.  Passive income in a corporation is taxed at the highest tax rate.  Therefore investing personally is more tax effective unless the individual is already at the highest marginal tax rate.  However, this being said, the advantage of investing through Corporations is that you can maintain control of your assets without ownership of them.  This allows for creditor protection.

ASSET ALLOCATION:  A big key for tax savings in investments is asset allocation.  Allocating which spouse or family member holds the investment, allocating the trust, or a corporation to hold the investment, or holding the investment offshore, all lead to tax savings when planned properly.

For more on tax planning for investors, send me an email at info@kustomdesign.ca or just go through the Ask the Guru section. 

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. 

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.

MORE WAYS TO SAVE ON TAX FOR SELF-EMPLOYED AND BUSINESS OWNERS

Here are more ways for the self-employed people and business owners to save on their taxes:

·          Deducting Business Expenses:  You can deduct any and all expenses that you incur for your business.  These expenses can be in the life of the corporation, or before the incorporation. 

·          Use Dividends:  Dividends are very tax effective.  Dividends come out of the retained earnings, which is after the Corporation has already paid tax. 

·          Make spouses and dependents over 18 shareholders of the corporation:  This makes it easy to split income in the form of dividends.

·          Utilize Private Health Service Plans (PHSPs).  These plans allow you to deduct 100% of your medical expenses through your company.  You can also use PHSPs to pay for family members and employee’s medical expenses.

These are just some of the ways you as a self-employed individual or business owner can save tax. There are so many other ways to be able to maximize your tax deductions and credits.   Remember, it is always best to see a tax professional to help you with your tax planning. 

If you have any questions, please email me at info@kustomdesign.ca or just use the Ask the Guru section of the website.

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!

ALLOCATING TAX DEDUCTIONS BETWEEN COUPLES

Like tax credits, there are also a number of tax deductions that couples need to look at during tax planning.  Here’s a list of possible tax deductions that can be split or allocated between couples.

• RRSPs (REGISTERED RETIREMENT SAVINGS PLAN).  The contributor is the person who puts the money in and gets the tax benefit, and the annuitant is the person whose account the RRSP contribution goes to.  Simply have the spouse who needs the tax deduction make the RRSP contribution.
• CHILD CARE EXPENSES can be allocated to either spouse.
• MOVING EXPENSE  can be allocated between spouses depending on how much income each one has.
• INTEREST & CARRYING CHARGES.  Money borrowed to invest should be borrowed by the spouse who is going to claim the income.  Couples can also share the deduction by both being on the loan or line of credit.

If your spouse has no income, you can claim them as your dependent.  This allows you to claim all of his/her personal exemptions.  If you are a single parent, you can claim your child as an eligible dependent giving you the equivalence of your spousal personal exemptions.

Next Page »