Behind every small to medium enterprise is a person. Does your corporate tax strategy consider the person that is the entrepreneur?
A tax strategy should consider both the corporate tax AND personal tax implications.
What mix puts the most dollars in your jeans at the end of the day?
Open and honest communication with your accountant is critical.
Does your accountant know YOU as well as your business?
Knowing YOU is a critical factor in deciding on the best solution for owner compensation. Without a full understanding of your situation, the wrong compensation plan can cost you big bucks.
What do you have going on in your household for tax purposes?
- Do you have a spouse? What is their income level?
- Do you have other sources of income? Giant expenses to deduct this year?
- Significant life changes planned in the next year or two? A new house, children, a marriage, a divorce? Retirement plans?
- What is your five-year plan?
- What about children? How old are they? Plans for post-secondary education?
- Does anyone in your household have medical issues or disabilities?
I’ve often said that the more I know about my clients, the more opportunities for tax savings. A corporate tax strategy that fails to consider these factors isn’t much of a plan.
The corporate tax strategy should be pro-active.
- AVOID PERSONAL TAX SURPRISES. Based on your corporate activities, what is your personal tax bill going to be? What are some opportunities to mitigate that personal tax hit? RRSPs? Donations? (One of my favorite clients has me calculate how many charitable donations are required to eliminate his personal tax bill each year. That guy makes my heart smile.)
- TAKE ADVANTAGE OF LOWER TAX BRACKETS. Perhaps your personal income is low this year, but you are planning on buying a house next year. You were planning on drawing significantly more out of your corporation for the down payment. It’s likely a terrible idea to have personal income in 2020 of $20,000 and $200,000 in 2021. Smooth this out over the two years so that you’re taking full advantage of the pleasant tax brackets in 2020 and avoiding the ugly brackets in 2021. Think about bumping up your income to $120,000 in 2020 and buying an RRSP to take advantage of the Home Buyers Plan for that down payment (if you qualify).
- INCOME SPLITTING OPPORTUNITIES. In a family business, everyone pitches in at some point or another. Should you consider paying your spouse a wage? Can you justify putting your children on the payroll? ***NOT YOUR TODDLER*** Perhaps your older child helps clean up the shop or organize paperwork. Pay them a reasonable and justifiable wage instead of an allowance. From there, they can pay for their own expenses or college savings.
- DO NOT PROCRASTINATE. The longer you wait to supply your year-end to your accountant, the fewer tax planning opportunities there are. Keep on top of things and get your corporate documents to your accountant within a month or two of your year-end. I picture my October year-end guy that brings his year-end to me in April. There is very little I can recommend for him to reduce the corporate tax bill or his personal tax bill. To further rub salt in those tax bill wounds, he typically has to pay interest and penalties for late remittances.
Do you think you have a “one strategy for all” accountant? I’d be happy to provide a second opinion in a complimentary consultation. Contact Richardson Miller LLP today!
Angela Richardson is a Chartered Professional Accountant (CPA, CGA) with more than 17 years experience working in public practice with small to medium sized businesses. While financial statements and tax returns are part of the occupation, consulting and assisting clients to achieve their entrepreneurial dreams is her true passion.