2022 Year End Tax Tips and Strategies for Business Owners

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Now that we’re approaching the end of the year, it’s time to review your business finances. We’ve highlighted the most critical tax-planning tips you need to know as a business owner.

Salary/Dividend Mix

As a business owner, an essential part of tax planning is determining if you receive salary or dividends from the business.

When you’re paid a salary, the corporation can claim an income tax deduction, which reduces its taxable income. You include this pay in your personal taxable income. You’ll also create Registered Retirement Savings Plan (RRSP) contribution room. 

The alternative is the corporation can distribute a dividend to you. The corporation must pay tax on its corporate income and can’t claim the dividend distributed as a deduction. However, because of the dividend tax credit, the dividend typically pays a lower tax rate (than for salary) on eligible and non-eligible dividends. 

In addition to paying yourself, you can consider paying family members. These are the main options you can consider when determining how to distribute money from your business:

  • Pay a salary to family members who work for your business and are in a lower tax bracket. This enables them to declare an income so that they can contribute to the CPP and an RRSP. You must be able to prove the family members have provided services in line with the amount of compensation you give them.

  • Pay dividends to family members who are shareholders in your company. The amount of dividends someone can receive without paying income tax on them will vary depending on the province or territory they live in.

  • Distribute money from your business via income sprinkling, which is shifting income from a high-tax rate individual to a low-rate tax individual. However, this strategy can cause issues due to tax on split income (TOSI) rules. A tax professional can help you determine the best way to “income sprinkle” so none of your family members are subject to TOSI.

  • Keep money in the corporation if neither you nor your family members need cash. Taxes can be deferred if your corporation retains income and the corporation’s tax rate is lower than your tax rate.

No matter what strategy you take to distribute money from your business, keep in mind the following:

  • Your marginal tax rate as the owner-manager.

  • The corporation’s tax rate.

  • Health and payroll taxes

  • How much RRSP contribution room do you have?

  • What you’ll have to pay in CPP contributions.

  • Other deductions and credits you’ll be eligible for (e.g., charitable donations or childcare or medical expenses).

Compensation

Another important part of year-end tax planning is determining appropriate ways to handle compensation. Compensation is financial benefits that go beyond a base salary.

These are the main things to consider when determining how you want to handle compensation:

  • Can you benefit from a shareholder loan? A shareholder loan is an agreement to borrow funds from your corporation for a specific purpose and offers deductible interest.

  • Do you need to repay a shareholder loan to avoid paying personal income tax on your borrowed amount? 

  • Is setting up an employee profit-sharing plan a better way to disburse business profits than simply paying a bonus?

  • Keep in mind that when an employee cashes out a stock option, only one party (the employee OR the employer) can claim a tax deduction on the cashed-out stock option.

  • Consider setting up a retirement compensation arrangement (RCA) to help fund your or your employee’s retirement. 

Passive Investments

One of the most common tax advantages available to Canadian-controlled private corporations (CCPC) is the first $500,000 of active business income in a CCPC qualifies for the small business deduction (SBD), which reduces the corporate tax rate by 12 to 21 percent, depending on the province or territory. 

With the SBD, you can reduce your corporate tax rate, but remember that the SBD will be reduced by five dollars for every dollar of passive investment income over $50,000 your CCPC earned the previous year.

The best way to avoid losing any SBD is to ensure that the passive investment income within your associated corporation group does not exceed $50,000.

These are some of the ways you can make sure you preserve your access to the SBD:

  1. Defer the sale of portfolio investments as necessary.

  2. Adjust your investment mix to be more tax efficient. For example, you could hold more equity investments than fixed-income investments. As a result, only 50% of the gains realized on shares sold are taxable, but investment income earned on bonds is fully taxable.

  3. Invest excess funds in an exempt life insurance policy. Any investment income earned on an exempt life insurance policy is not included in your passive investment income total. 

  4. Set up an individual pension plan (IPP). An IPP is like a defined benefit pension plan and is not subject to the passive investment income rules.

Depreciable Assets

Consider speeding up the purchase of depreciable assets for year-end tax planning. A depreciable asset is a capital property on which you can claim Capital Cost Allowance (CCA).

Here’s how to make the most of tax planning with depreciable assets:

  • Make use of the Accelerated Investment Incentive. This incentive makes some depreciable assets eligible for an enhanced first-year allowance.

  • Purchase equipment such as zero-emissions vehicles and clean energy equipment eligible for a 100 percent tax write-off.

  • Consider postponing the sale of a depreciable asset if it will result in recaptured depreciation for your 2022 taxation year.

Qualified Small Business Corporation (QSBC) Share Status

Ensure your corporate shares are eligible to get you the $913,630 (for 2022) lifetime capital gains exemption (LCGE). The LCGE is $1,000,0000 for dispositions of qualified farm or fishing property.

Suppose you sell QSBC shares scheduled to close in late December 2022 to January 2023. In that case, you may want to consider deferring the sale to access a higher LCGE of $971,190 for 2023 and therefore defer the tax payable on any gain arising from the sale.

Consider taking advantage of the LCGE and restructuring your business to multiply access to the exemption with other family members. But, again, you should discuss this with us, your accountant and legal counsel to see how this can benefit you. 

Donations

Another essential part of tax planning is to make all your donations before year-end. This applies to both charitable donations and political contributions.

For charitable donations, you need to consider the best way to make your donations and the different tax advantages of each type of donation. For example, you can:

  • Donate Securities

  • Give a direct cash gift to a registered charity

  • Use a donor-advised fund account at a public foundation. A donor-advised fund is like a charitable investment account.

  • Set up a private foundation to solely represent your interests.

We can help walk you through the tax implications of these types of charitable donations.

Get year-end tax planning help from someone you can trust!

We’re here to help you with your year-end tax planning. So book a meeting with us today to learn how you can benefit from these tax tips and strategies.

Contact Us

Five Ways To Withdraw Money From Your Business In A Tax-Efficient Manner

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Five Ways To Withdraw Money From Your Business In A Tax-Efficient Manner

You have worked long and hard to build up your business, and now you are ready to withdraw money from your business’ bank account. But you don’t want to get hit with a huge tax bill. So here are 5 ways to withdraw money from your business in a tax-efficient manner.

1) Pay Yourself And Your Family Members

You can pay yourself a salary from your business and pay any family members who work in your business. However, the salary you pay family members must not be excessive – it must be in line with what they would receive for doing the same work elsewhere.

You and your family members will be taxed at the regular personal marginal tax rates on your salaries. However, your corporation can make a deduction based on salaries paid when determining taxable income.

2) Pay Out Taxable Dividends

You can use dividends to distribute money from your corporation to both yourself and family members if everyone holds shares in your corporation. However, when distributing dividends to a shareholder, it is critical to consider both the tax on split income (TOSI) rules and the corporate attribution rules before any distribution is made.

  • TOSI rules – Under the current income tax rules, the TOSI applies the highest marginal tax rate (currently 33%) to “split income” of an individual under the age of 18. In general, an individual’s split income includes certain taxable dividends, taxable capital gains and income from partnerships or trusts. – Canada.ca

  • Corporate attribution rules – Corporate attribution rules may result in additional tax if a transfer or loan to a corporation is made to shift income to another family member. This can result in additional tax for the individual making the transfer or loan.

3) Pay Out Capital Dividends

Another way to pay out dividends is via your corporation’s capital dividend account (CDA). Money in your corporation’s CDA can be dispersed to Canadian resident shareholders as a tax-free dividend, but be sure you are clear on what can legally be allowed in your CDA before you do this.

4) Adjust Your Salary And Dividend Mix

Keeping the right mix when paying yourself a salary and paying yourself via dividends is essential. You need to consider various factors – such as your cash flow needs, earned income for RRSP contributions, and any impact on taxes and other regulatory requirements – paying out salaries and dividends can have.

5) Repay Any Outstanding Shareholder Loans

If you loaned money to your company in the form of a shareholder loan, now may be the time to have your company repay that loan. Any money you receive to settle your shareholder loan will be paid to you as a tax-free distribution.

The Takeaway

Regardless of why you need to take cash out of your business, it is crucial to plan how to withdraw the money so you can do it in the most tax-efficient manner possible. Unfortunately, there is no one-size-fits-all solution for this, which is why talking to a professional advisor is so important.

We can help design a tax-optimized compensation strategy for you. Contact us to set up a meeting today!

Financial Planning For Self-Employed Contractors

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Financial Planning for Self-Employed Contractors

Being a self-employed contractor can bring you a large cash flow and the satisfaction of being your own boss – but it can also make financial planning more complicated than being an employee.

When creating a financial plan, Self-employed contractors need to keep the following in mind:

  • Cash flow management – Knowing what money you have moving in and out of your business is essential. You never want to suddenly find out you are short on cash, especially if you are considering expanding your business.
  • Tax planning – Tax planning can be complicated for self-employed contractors. Working with a professional can help ensure you are aware of your options, such as claiming the correct tax deductions and the most tax-effective way to pay yourself.
  • Attracting and retaining good employees – Employees are looking for more than just a good paycheque; they also want a robust benefits program, work-life balance, and pension plans.
  • Risk management – You must protect yourself if something happens to you, such as being injured or falling ill. The best way to protect yourself is with the right insurance, such as disability, critical illness, and life insurance.
  • Retirement planning – As a self-employed contractor, this is a must as you won’t have a company pension plan to fall back on. You can’t work forever, so it’s essential to have a variety of income sources during your retirement years, including RRSPs, TFSAs, and an Individual Pension Plan (IPP).
  • Succession planning – This type of planning is critical and can be triggered by various events, including divorce, retirement, and your illness or death. You must put a plan in place that covers what will happen if any of these events occur. In addition, it’s essential to have the financial resources to ensure the plan can be successfully enacted.
  • Buy-sell agreement – If you are a self-employed contractor working with a partner, you must have a buy-sell agreement. This agreement stipulates what will happen if one partner leaves the business for any reason. Buy-sell agreements can be funded in various ways, including via life insurance.

The best way to ensure you’ve got a solid financial plan is to work with a good team who has your best interests in mind. No matter what aspect of financial planning you are interested in – from tax planning to succession planning – we can help you get started. So call us or contact us online today to get started!

Group Retirement Benefits

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Working at an organization that offers a pension plan is one of the greatest financial advantages a Canadian can enjoy. Pension plans are designed to provide retirement income and help employees reach their retirement goals and for business owners- help retain key employees.

Pension plans can offer:

  • Employer contributions

  • Forced retirement savings for employee

There are 2 main types of pension plan:

  • Defined Benefit Plan

  • Defined Contribution Plan

Defined Benefit Plan

  • Retirement income is guaranteed, contributions are not.

  • The pension amount is based on a formula that includes the employee’s earnings and years of service with the employer

  • Usually, contributions are made by the employee and employer

  • The employer is responsible for investing the contributions to ensure there’s enough money to pay the future pensions for all plan members.

  • If there’s a shortfall, the employer pays the difference.

Defined Contribution Plan

  • Contributions are guaranteed, retirement income is not.

  • Usually, contributions are made by the employee and employer.

  • The employee is responsible for investing all contributions.

  • The amount available in retirement depends on how the investment performs including total contributions.

  • At retirement, the money in the account can be used to generate retirement income through purchasing an annuity or transferring the amount to a locked-in retirement income fund.

In summary, a defined benefits plan guarantees you a retirement income and a defined contribution plan guarantees contributions but not retirement income.

Talk to us, we can help.

2021 Year-End Tax Tips for Business Owners

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2021 Year-End Tax Tips for Business Owners

Now that we’re approaching the end of the year, it’s time to review your business finances. We’ve highlighted the most critical tax-planning tips you need to know as a business owner.

Salary and Dividend Mix

As a business owner, one essential part of tax planning is determining the right mix of salary and dividends for both yourself and your family members.

The following are the main options you can consider when determining how to distribute money from your business:

  1. Pay a salary to family members who work for your business and are in a lower tax bracket – This enables them to declare an income so that they can contribute to the Canada Pension Plan (CPP) and a Registered Retirement Savings Plan (RRSP). You must be able to prove the family members have provided services in line with the amount of compensation provided.

  2. Pay dividends to family members who are shareholders in your company – The amount of dividends someone can receive without paying income tax on them will vary depending on the province or territory they live in.

  3. Distribute money from your business via income sprinkling – This is shifting income from a high-tax rate individual to a low-rate tax individual. However, this strategy can cause issues due to Tax On Split Income (TOSI) rules. A tax professional can help you determine the best way to “income sprinkle” so none of your family members are subject to TOSI.

  4. Keep money in the corporation if neither you nor your family members need cash – Taxes can be deferred if your corporation retains income and the corporation’s tax rate is lower than your personal tax rate.

No matter what strategy you take to distribute money from your business, keep in mind the following:

  • Your marginal tax rate as the owner-manager.

  • The corporation’s tax rate.

  • Health and payroll taxes.

  • How much RRSP contribution room do you have.

  • What you’ll have to pay in CPP contributions.

  • Other deductions and credits you’ll be eligible for (e.g., charitable donations or childcare or medical expenses).

Compensation

An important part of year-end tax planning is determining appropriate ways to handle compensation. The following are the main things to consider:

  1. Can you benefit from a shareholder loan? A shareholder loan is an agreement to borrow funds from your corporation for a specific purpose. The interest from the loan may be deductible if the proceeds of the shareholder loan were used to produce income from business or property.

  2. Do you need to repay a shareholder loan to avoid paying personal income tax on the amount you borrowed?

  3. Is setting up an employee profit-sharing plan a better way to disburse business profits than simply paying out a bonus?

  4. Keep in mind that when an employee cashes out a stock option, only one party (the employee OR the employer) can claim a tax deduction on the cashed-out stock option.

  5. Think about setting up a Retirement Compensation Arrangement (RCA) to help fund you or your employee’s retirement.

Passive Investments

One of the most common tax advantages available to Canadian-Controlled Private Corporations (CCPC) is the Small Business Deduction (SBD).

For qualifying businesses, the SBD reduces your corporate tax rate. Keep in mind that the SBD will be reduced by five dollars for every dollar of passive investment income over $50,000 your CCPC earned the previous year.

The best way to avoid losing any of the SBD is to make sure that the passive investment income within your associated corporation group does not exceed $50,000.

These are some of the ways you can make sure you preserve your access to the SBD:

  1. Defer the sale of portfolio investments as necessary.

  2. Adjust your investment mix to be more tax efficient. For example, you could choose to hold more equity investments than fixed-income investments. Only 50% of the gains realized on shares sold is taxable, but investment income earned on bonds is fully taxable.

  3. Invest excess funds in an exempt life insurance policy. Any investment income earned on an exempt life insurance policy is not included in your passive investment income total.

  4. Set up an individual pension plan (IPP). An IPP is like a defined benefit pension plan and is not subject to the passive investment income rules.

Depreciable Assets

Another tactic you should consider for year-end tax planning is to hasten your purchase of any depreciable assets. A depreciable asset is a type of capital property that you can claim the Capital Cost Allowance (CCA) on.

These are two of the best ways to make the most of tax planning with depreciable assets:

  1. Make use of the Accelerated Investment Incentive. With this incentive, some depreciable assets are eligible for an enhanced first-year allowance.

  2. Purchase equipment such as zero-emissions vehicles and clean energy equipment eligible for a 100 percent tax write-off.

Donations

Another essential part of tax planning is to make all of your donations before year-end. This applies to both charitable donations and political contributions.

For charitable donations, you need to consider the best way to make your donations and the different tax advantages of each type of donation. For example, you can:

  • Donate securities.

  • Give a direct cash gift to a registered charity.

  • Use a donor-advised fund account at a public foundation. A donor-advised fund is like a charitable investment account.

  • Set up a private foundation to solely represent your interests.

We can help walk you through the tax implications of each of these types of charitable donations.

Make the Most of Covid-19 Relief Programs

While some COVID-19 relief programs, such as the Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) have ended, others are still available. See if your business can benefit from any of the following relief programs:

  1. Canada Recovery Hiring Program (CRHP). This program will continue to run until May 2022. If your business is eligible and continues to experience a decline in revenues as compared to pre-pandemic levels. In that case, the CRHP will provide support to assist in hiring new staff or increasing the wages of your existing staff.

  2. Tourism and Hospitality Recovery Program. This new program provides wage and rent support to eligible businesses such as hotels and restaurants with an average monthly revenue reduction of at least 40% over the first 13 qualifying periods for the CEWS and a current month revenue loss of at least 40%.

  3. Hardest Hit Business Recovery Program. This provides rent and wage support of up to 50% for eligible entities. Eligible entities must meet two conditions – an average monthly revenue reduction of at least 50% over the first 13 qualifying periods for the CEWS and a current month revenue loss of at least 50%.

  4. General support in the event of a public health lockdown. If there is a public health lockdown and your business loses sufficient revenue, your business would be eligible for support at the same subsidy rates as the Tourism and Hospitality Recovery Program.

  5. Know what’s included as taxable income. If you received assistance from the government assistance programs, including the CEWS, CERS, and CRHP, this assistance is taxable as income.

Get year-end tax planning help from someone you can trust!

We’re here to help you with your year-end tax planning. Book some time with us today to learn how you can benefit from these tax tips and strategies.

Importance of a Buy-Sell Agreement

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Starting a new business venture can be both exciting and nerve-racking at the same time. The hopes and dreams of success, financial freedom, and being your own boss are accompanied by many uncertainties and risks. To add to some of the anxiety comes the facts: about half of all new businesses will not be around within the next 5, and only about one-third will survive 10+ years. The situation often becomes more complex when there are multiple owners and the future success of a business is at risk if proper planning is not done. The unexpected ‘exit’ of a partner due to death, disability, illness, retirement, or just simply that ‘it’s not working out’ can create a very difficult situation for the remaining business owner(s) and the business itself. Many businesses operate under a ‘handshake’ sort of agreement, but those rarely are upheld when the situation starts to get challenging. In order to protect against all of these pitfalls, it is always advised to have the right structure in place to address any potential challenges that may arise. This is done by incorporating a Buy-Sell Agreement between the owners.

What is a Buy‐Sell Agreement?

A buy-sell agreement is a legally binding contract designed to establish a set of rules or actions for the remaining business owner(s) to carry on the business, in the event one of them is no longer involved in the business – this can be due to death, illness, injury, retirement or a simple desire to ‘get out’. In other words, this document dictates how the remaining owner(s) will interact with each other and how the business will operate when certain situations occur. This agreement creates certainty and a ‘game plan’ in case one or more of the partners are no longer able or willing to commit to the business.

Types of Buy‐Sell Agreements

Buy-sell agreements are generally structured as a cross purchase agreement, promissory note agreement, or share redemption agreement. With a cross-purchase agreement, each shareholder within the agreement agrees to purchase a specified percentage of the shares owned by the departing shareholder, and if it’s due to death, the deceased shareholder’s estate is obligated to sell the shares to the remaining shareholder(s). A shareholder will generally purchase insurance on the life of the other shareholder(s) and on death, will use the proceeds from the insurance to buy out the remaining shares from the deceased shareholder’s estate. With a promissory note agreement, corporate owned life insurance is placed on the life of each shareholder, with the corporation named as the payor and beneficiary. In the event that a shareholder dies, the surviving shareholder(s) purchases the deceased’s shares from their estate using a promissory note. Once the remaining shareholder(s) owns the deceased shareholder’s shares, the company collects the death benefit on the insurance policy with the excess amount above the adjusted cost basis of the policy in the capital dividend account. The company then provides the surviving shareholder(s) a capital dividend which provides the remaining shareholder(s) the necessary funds to pay off the promissory note. Under the share redemption arrangement corporate owned life insurance is placed on the life of each shareholder with the corporation named as the payor and beneficiary. In the event that a shareholder dies, the company collects the insurance proceeds and places the excess amount above the adjusted cost basis of the policy in the capital dividend account. The company uses the proceeds in the capital dividend account to redeem the shares held by the deceased shareholder’s estate. Once that is done, the remaining shareholder(s) takes over the ownership of those purchased shares. Each structure has their advantages and disadvantages and should be reviewed with a legal professional, tax professional as well as a knowledgeable Financial Advisor.

Why the business needs a buy‐sell agreement

A buy-sell agreement is a crucial component of a business that should be incorporated to protect the shareholders as well as the business itself. It is designed to ensure important things are taken care of if someone leaves the business for whatever reason, so that the business can continue to grow and run successfully. A buy-sell agreement offers several key benefits to your business:

  • It maintains the continuity of your business by ensuring members get to decide what happens to the business before any problems arise.

  • It protects company ownership by laying out a succession plan for departing members. This keeps remaining shareholders from being burdened by untested and unproven successors (like the widow or children of the departing co-owner).

  • It minimizes disputes between remaining co-owners and the family of the departing owner by having a strategy in place ahead of time to govern business operations.

  • It alleviates co-owner stress and uncertainty by specifically identifying which events would trigger a buyout.

  • It protects business assets and liquidity by providing a financial (and tax) plan for each of the different triggers addressed in the agreement.

  • It protects the interest of, not just the business entity itself, but also that of the business owners to ensure members (and their families, in the event of death or disability) are handled with respect, courtesy and the utmost fairness.

What to include in the buy‐sell agreement

Since a buy-sell agreement is a legally binding document, it generally should be drafted with a knowledgeable and experienced Legal Professional. Most agreements are started through a generic template, but then are customized for the needs of each business/partner and can be a fairly thorough and comprehensive document. There are several different components of a buy-sell agreement and several different aspects need to be addressed, such as the valuation of the company, ownership interests, buy-out clauses, and terms of payment. The agreement should generally be drafted at the very start of the business, so as to avoid any issues or misunderstandings later on. The agreement will also address certain ‘triggering events’, which are listed below.

Disagreement

The conflict between owners of a business in regards to the direction or management of the business can sometimes occur, and can even push the most successful business off-course. In a situation where no agreement or mediation can be reached, it may make sense to allow for one or more of the partners to be bought out. This would allow the business to continue moving forward and is often referred to as a ‘shot-gun clause’. Sometimes a situation where one owner offers to buy out the other would also offer to be bought out for the same value, thus ensuring fair treatment and value of the shares.

Divorce

An owner who is in the midst of a divorce may be bought out by other partners, to protect the company ownership. A divorce settlement will generally depend on the partner’s share of the business. It’s not uncommon for a family law judge to order a business owner to split his or her interest in a company with the former spouse. To protect the business from this event, a clause should require the shares held by the former spouse of a partner to be acquired by the company or one of the other owners.

Retirement

The value of the business comprises a significant component for the retirement of many business owners. Allowing the remaining partners to reclaim the interest in the business keeps the business intact and provides the retiring partner with a market to liquidate their ownership, thus providing the retiring partner with a cash infusion to enjoy their retirement. There may also be some distinction in the agreement between early retirement and regular retirement and how the shares of the departing owner are to be valued.

Bankruptcy

Borrowing money to expand or grow the company, or to purchase equipment or goods, is common for many companies. However, lending institutions often require personal guarantees from the owners/shareholders of the business. Having one or more owners that are not able to provide this guarantee can lead to higher fees and impact the overall financial well-being and growth of the business. Therefore, a provision should be considered to allow the other shareholders the opportunity to acquire shares of the defaulting shareholder(s).

Disability

An owner who has become disabled and unable to perform their duties can impact the overall well-being of the business. The agreement should address several situations and questions, such as whether the partner will continue to receive a salary, and for how long, or whether they will continue in the day-to-day management of the company.The buy-sell agreement also needs to clearly define what is considered a disability and should include a timeline for which the disabled partner would be given the opportunity to return. Often the business will purchase disability buy-sell insurance and link the definitions to the plan. This has the added benefit of providing an independent third party to determine when the criteria for the buy-out are satisfied.

Death

The death of a partner is an unfortunate and difficult situation for both the family and business partners alike. To deal with the stress of continuing the business, establishing the rules of business continuity upon death provides peace of mind to both the surviving partners and the family of the deceased. The surviving partners benefit from the assurance of not having to deal with an unwanted partner and the family is assured that they will be treated fairly. Generally, all partners/co-owners will be covered by a ‘key person’ life insurance policy, which can be paid by either the company or the other partners, where the death benefit would be used to buy out the deceased owner’s shares (as mentioned above).

Funding the buy‐sell agreement

Without sufficient resources to fund a potential buy-out, the agreement itself can fall apart. The partners need to decide where the money will come from to complete the buy-out – whether it will be the responsibility of individual owners or from the company itself. While not all events can be protected, two can: the death and disability of a shareholder. By using an insurance policy, funds can be made available at the time they are needed, thus minimizing potential liquidity issues, protecting the business and the impacted shareholders, as well as the family of the deceased shareholder. Using insurance provides the protection needed at a fraction of the cost to the alternatives and can provide immediate capital and significant tax benefits.

Working as a partnership between 2 or more individuals is never an easy task, and the situation only gets more complicated when one or more of them exits the business. Protecting not only the business, but your personal interests, as well as your family’s future are very important objectives for any business owner, and should not be overlooked. Although no business can be certain of success, there are strategies and structures that can help protect the business from failure in the future. Working with a knowledgeable and experienced Financial Advisor, Legal Professional and Tax Professional, you can be assured that you can have the proper Buy-Sell Agreement in place so that all parties involved benefit.

Salary vs Dividend

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As a business owner, you have the ability to pay yourself a salary or dividend or a combination of both. In this article and infographic, we will examine the difference between salary and dividends and review the advantages and disadvantages of each.

When deciding to pay yourself as a business owner, please review these factors:

  • How much do you need?

  • How much tax?

  • Other considerations including retirement and employment insurance.

How much do you need?

Determine your cash flow on a personal and corporate level.

  • What’s your personal after-tax cash flow need?

  • What’s your corporate cash flow need?

How much tax?

Figure out how much you will pay in tax. Business owners understand that tax is a sizeable expense.

  • What’s your personal income tax rate?

Depending on the province you reside in and your income, make sure you also include income from other sources to determine your tax rate. (Example: old age security, pension, rental, investment income etc.)

If you decide to pay out in dividends, check if you will be paying out eligible or ineligible dividends. The taxation of eligible dividends is more favorable than ineligible dividends from an individual income tax standpoint.

  • What’s your corporation’s income tax rate?

For taxation year 2020, the small business federal tax rate is 9% . Please also remember, if you pay out salary, salary is considered a tax-deductible expense, therefore this will lower the corporation’s taxable income versus paying out dividends will not lower the corporation’s taxable income.

Other considerations

If you pay yourself a salary, these options are available.

  • Do you need RRSP contribution room?

As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make.

  • Are you interested in contributing to the Canada Pension Plan?

This is unique to your circumstances and a cost-benefit analysis to determine the amount of contributions makes sense.

  • Do you need employment insurance (EI)?

For shareholders owning more than 40% of voting shares, EI is optional. There are situations worth careful thought such as maternity benefit, parental benefit, sickness benefit, compassionate care benefit, family caregiver benefit for children or family caregiver benefit for adults.

The infographic below summarizes the difference between Salary vs. Dividend.

We would also advise that you get in touch with your accountant to help you determine the best mix for your unique situation.

Contact Us

The Importance of a Financial Plan

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Working with us to create your financial plan helps you identify your long and short term life goals. When you have a plan, it’s easier to make decisions that align with your goals. We outline 8 key areas of financial planning:

  • Income: learn to manage your income effectively through planning

  • Cash Flow: monitoring your cash flow, will help you keep more of your cash

  • Understanding: understanding provides you an effective way to make financial decisions that align with your goals

  • Family Security: having proper coverage will provide peace of mind for your family

  • Investment: proper planning guides you in choosing the investments that fit your goals

  • Assets: learn the true value of your assets. (Assets – Liabilities)

  • Savings: life happens, it’s important to have access to an emergency fund

  • Review: reviewing on a regular basis is important to make sure your plan continues to meet your goal

Insurance Planning for Business Owners

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For business owners, making sure your business is financially protected can be overwhelming. Business owners face a unique set of challenges when it comes to managing risk. Insurance can play an important role when it comes to reducing the financial impact on your business in the case of uncontrollable events such as disability, critical illness or loss of a key shareholder or employee.

This infographic addresses the importance of corporate insurance.

The 4 areas of  insurance a business owner should take care of are:

  • Health

  • Disability

  • Critical Illness

  • Life

Health: We are fortunate in Canada, where the healthcare system pays for basic healthcare services for Canadian citizens and permanent residents. However, not everything healthcare related is covered, in reality, 30% of our health costs* are paid for out of pocket or through private insurance such as prescription medication, dental, prescription glasses, physiotherapy, etc.

For business owners, offering employee health benefits make smart business sense because health benefits can form part of a compensation package and can help retain key employees and attract new talent.

For business owners that are looking to provide alternative health plans in a cost effective manner, you may want to consider a health spending account.

Disability: Most people spend money on protecting their home and car, but many overlook protecting their greatest asset: their ability to earn income. Unfortunately one in three people on average will be disabled for 90 days or more at least once before the age of 65.

Consider the financial impact this would have on your business if you, a key employee or shareholder were to suffer from an injury or illness. Disability insurance can provide a monthly income to help keep your business running.

Business overhead expense insurance can provide monthly reimbursement of expenses during total disability such as rent for commercial space, utilities, employee salaries and benefits, equipment leasing costs, accounting fees, insurance premiums for property and liability, etc.

Key person disability insurance can be used to provide monthly funds for the key employee while they’re disabled and protect the business from lost revenue while your business finds and trains an appropriate replacement.

Buy sell disability insurance can provide you with a lump sum payment if your business partner were to become totally disabled. These funds can be used to purchase the shares of the disabled partner, fund a buy sell agreement and reassure creditors and suppliers.

Critical Illness: For a lot of us, the idea of experiencing a critical illness such as a heart attack, stroke or cancer can seem unlikely, but almost 3 in 4 (73%) working Canadians know someone who experience a serious illness. Sadly, this can have serious consequences on you, your family and business, with Critical Illness insurance, it provides a lump sum payment so you can focus on your recovery.

Key person critical illness insurance can be used to provide funds to the company so it can supplement income during time away, cover debt repayment, salary for key employees or fixed overhead expenses.

Buy sell critical illness insurance can provide you with a lump sum payment if your business partner or shareholder were to suffer from a critical illness. These funds can be used to purchase the shares of the partner, fund a buy sell agreement and reassure creditors and suppliers.

Life: For a business owner, not only do your employees depend on you for financial support but your loved ones do too. Life insurance is important because it can protect your business and also be another form of investment for excess company funds.

Key person life insurance can be used to provide a lump sum payment to the company on death of the insured so it can keep the business going until you an appropriate replacement is found. It can also be used to retain loyal employees by supplying a retirement fund inside the insurance policy.

Buy sell life insurance can provide you with a lump sum payment if your business partner or shareholder were to pass away. These funds can be used to purchase the shares of the deceased partner, fund a buy sell agreement and reassure creditors and suppliers.

Loan coverage life insurance can help cover off any outstanding business loans and debts.

Reduce taxes & diversify your portfolio, often life insurance is viewed only as protection, however with permanent life insurance, there is an option to deposit excess company funds not needed for operations to provide for tax-free growth (within government limits)  to diversify your portfolio and reduce taxes on passive investments.

Talk to us about helping making sure you and your business are protected.

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