Do you own an incorporated small business?

The federal government is proposing some significant changes to the tax rules around these entities. Coming into effect in 2018, these changes will mean significant changes for the way small businesses file their taxes. Be sure you and your corporation are ready to adapt your tax practices accordingly.

Here are a few of the proposed changes that you should know about:

Increase in Dividend Tax and Income Sprinkling

The government will increase the tax on dividends paid to family members who are shareholders of a small business corporation. Under the new rules, recipients of dividends from the corporation will be taxed at the highest marginal rate. This change will make it more difficult to distribute wealth within a family from a small business corporation.

Passive Investment Income

Under the old tax regime, holding money in a fund under the title of the corporation was a good way to shelter income. Presently, corporate income is eligible about 15 per cent tax rate (varying by province). Under the new tax rules, income to a corporation will be taxed at a higher rate, as will income as dividends. This means you’ll wind up paying more tax over all if you invest inside the corporation and then eventually pay that income out to yourself as dividends later on.

Tax on Investment Income or Capital Gains

Some corporations have realized that paying themselves in capital gains instead of salary can be a money saver with the tax man. Amendments are proposed in the new tax rules to change the practice of “anti-surplus stripping” and will effectively render this practice obsolete.

As you can see, there are some significant changes coming in the way that incorporated small businesses are taxed. Get informed on the best strategies and options available to you under these new rules and reduce your taxes by contacting Ati Bookkeeping and Taxes

After almost 14 years of tax experience, I’ve recently discovered that most people unfortunately don’t know their basic rights when it comes to claiming their tax deductions or credits. Individual taxes are becoming more complex and you should seek advice from tax experts. Contact me for a consultation.

Below the major upcoming some changes effective for the 2014 tax return!

• When you register for online mail, the CRA will no longer mail notices to you. Instead, you will receive an email notification that there is mail for you to view on the MY Account on line service

• You or your spouse/common law partner may be able to claim a non refundable tax credit of up to $2,000, if your child ordinarily lived with you (some conditions applied)

• Lifetime capital gains exemption for dispositions of qualified small business corporation has increased to $800,000 for the lifetime

• Adoption expenses eligible for each child has increased to $15,000

• Children’s fitness amount has increased to $1,000

• GST/HST credit no longer to apply. When you file your tax return, the CRA will determine your eligibility

• The rules for the $1,000 exemption for emergency services volunteers have changed

If you are an owner of a small business and you already set up a corporation, you may consider “Shareholder Loan” before paying yourself a salary or dividends.
Shareholder Loan means, when the owners of the business pay for the expenses on the behalf of their corporation therefore the company owes them. The expenses could be at the “Start-up expenses” or “Operating expenses”.
Shareholder Loan can be completely tax free, however, salary and dividends are both taxable.

Tip#3

Salary & Dividend Mix:

Following my previous blogs, the last option about how I should  pay myself at the end of this year would be if the owners of corporation are using a mix of dividends and salary in order to minimize their taxes. They still have to pay some taxes and CPP however,  you have already prepared yourself to pay some taxes and won’t be surprised towards the end of the year.

For instance, Mykel is an entrepreneur who owns ABC Co. He is living  in North Vancouver, BC. He wants to pay himself a mix salary and dividend for 2014 tax season. He would like to keep his taxable income at a lower tax bracket and minimize his taxes as well as, he wants to increase his earned income in order  to increase RSP room for the purpose of RRSP contribution.

After consulting with a tax specialist he decides to pay $35,551.00 dividend and $10,000.00 salary to himself at the end of 2014  .  The total of his taxable income would be something around $55,000.oo after gross up his dividends. He can decrease his taxes by contributing to his RSP at the end of 2014 (during year) or for the 60 days in the following year in 2015.

He will still be in the second bracket of the Federal and Provincial taxes (29.70 % both taxes) which still is less than 3k taxes for 2015 tax return.

If Mykel contributes $5000.00 RSP (monthly/lump sum) to his RSP plan, then he can save in significant tax charges for 2015 tax return.

If you are an active business owner and your corporation’s year end is on December 31st, then you are most likely getting ready to do your tax planning for this year to minimize the tax that you may have to pay.

Here are some of the advantages and disadvantages to compensate salary for the business owners.

Tip 2 “Salary”

• Salary is a deduction before paying corporate taxes, therefore it reduces the corporation’s income and profit at the end of year. However you need to pay tax on your personal tax return, also depending on which bracket you are.
• To be qualified for “Canada Employment Amount” on Federal and Provincial personal tax return
• If you’re willing to increase your Registered Retirement Savings Plan (RRSP) room then salary is good for you
• Contribute to the Canada Pension Plan (CPP) or Registered pension Plan Past(RPP)

The big disadvantages of salary are that you have to pay 100% tax, deductions such as CPP  and in addition to that you will need to set up a payroll program account so you have to remit your deductions to the CRA.

How should I pay myself this year?
– Dividends
– Salary
– Dividends & Salary

Tip 1: Dividends

Prior 2014 it was beneficial to the business owners to pay dividends rather than a salary from their corporation, however, it was changed on non- eligible dividends regarding the dividend tax credit in the last year federal budget.
Non-eligible dividends in 2013 Federal Budget reduced the gross-up from 25% to 18%, corresponding, the federal non-eligible dividend tax credit reduced from 13 1/3% to 11.017% of the taxable dividend for the 2014 tax return and later years.
As an active business owner with no income other than taxable Canadian Dividends in 2014 approximately $35,551.00 could be earned before any federal taxes on your personal tax return which to compare in 2013 was $43,432.00. Although, when the taxpayers have high incomes, they have to pay little tax on their income. The exemption level for federal minimum tax is $40,000.00
As you may see the following table, the federal column for non-eligible dividends shows the amount of actual dividends that can be earned before regular federal tax is payable, if there is no income other than the dividends. For the BC provincial column shows the amount of actual dividends that you can be earned before any regular provincial income tax is payable.

Stay tuned!!

Shopping: The best time to buy assets/expenses for business owners is close to year end, and claim expenses/depreciation for the whole year such as: printer, laptop, desk, furniture.

Events: Annual business events, such as Christmas parties or similar, are good opportunities to celebrate whilst being able to claim the expenses. Claims are 100% for the entire year if the employer sponsors events to all employees.
Note: Limited to six events each year (T4002 Business and Professional income)
http://www.cra-arc.gc.ca/E/pub/tg/t4002/t4002-13e.pdf

Travel: Do you have a dream to go to warmer place this winter? If you are the business owner, you may claim 100% of your travel cost if your trip is for client meetings or attending a seminar/conference related to your business;
Note: 50% may be claimed for meals and entertainment.

The CRA will not request personal information of any kind from a taxpayer by email!!
You may receive a subject line similar to the following:

“INTERAC e-Transfer from Canada Revenue Agency System”

Here is the link from Canada Revenue Agency (CRA)

http://www.cra-arc.gc.ca/ntcs/bwr-eng.html