As a result of the recent two percent reduction in the provincial tax rate for small businesses, there are tax planning strategies that are even more attractive for you to take advantage of.

As business owners we are keenly aware of looming tax deadlines and our annual panic to get our accountants the details of our personal and corporate taxes.  As we settle into 2009, it would be wise to schedule a planning meeting with your tax advisor to pro-actively prepare for the upcoming year.  By doing this, you can correctly manage your personal and corporate finances to your advantage and avoid the end of the year tax season panic.  Speaking as an advisor, your accountant will appreciate the opportunity to build a proper plan with you and showcase their best advice ahead of time rather than spend time collecting and deciphering your ledger at the filing deadline next year.

Once you have this meeting set, make an agenda of items you’d like to discuss.  On this year’s agenda, be sure to include a discussion on the following two tax strategies available to you as a business owner:

    Paying your own compensation via dividends rather than salary.
    Leaving excess cash in your corporation to create opportunities to invest in a more favourable tax environment.

Dividends vs. Salary - How should I get paid?
As a business owner, you have the option to pay yourself with corporate dividends rather than salary.  Depending on your situation, there may be benefits to paying yourself with dividends.

When a dividend is issued, the corporation pays corporate tax on the dividend and then the receiver (business owner) pays an income tax on the dividend.  The tax paid on the dividend is lower than if it was earned as salary, which is subject to a higher personal income tax rate.  The main reason to pay yourself with dividends is the net benefit is lower overall taxes.  For a proper analysis of your situation, you would need to have your accountant review the benefits and potential concerns for each scenario.  Following is a brief summary of these for your reference:

Benefits to Dividends

• Tax savings
• No payroll taxes
• No CPP payments
• Share dividend income evenly among shareholders (e.g. spouse)

Potential Concerns with Dividends

• CPP – your ability to draw on CPP for retirement diminishes as you are not paying into it
• Access to loans – it becomes more difficult to acquire personal financing without salary reported on a T4
• No RSP deductions – if you do not draw a salary, you do not earn RSP contribution room
• Acquiring personal insurance (life & disability) would be more difficult

Translating Tax Strategies into Investment Opportunities
Regardless of how you pay yourself – either by salary or by dividends – it is also worth re-assessing how much you withdraw from your corporation for personal use.  There are benefits to paying yourself enough to cover your immediate lifestyle needs and leaving the remainder as savings within your corporation to invest for the future.  In doing so, you create an opportunity to invest in a more favourable tax environment.  By investing within the corporation, the money is subject to corporate tax instead of income tax while it grows.

For example, a business owner leaves $60,000 every year in the corporation.  The tax savings would be the difference between the personal income tax rate (43% is the highest) and the current small business tax rate (13.5%):

$60,000 x (43%-13.5%) = $17,700 annual tax savings.

By leaving this money within the corporation the income tax is deferred and the $17,700 of tax saved each year can be invested.  Over 25 years at a 6% return, the total amount saved would be $971,000.  When you choose to withdraw this money it will be subject to personal income tax; however, you have benefitted from starting with more capital from which to grow your savings by deferring the tax to a later date.

Putting it all Together
Ensure that your accountant and your financial advisor are willing and able to work together.  In my practice, I keep in contact with my clients’ accountants to ensure our advice is coordinated and in the best interest of the client.  I create a Master Financial Plan with the client and update the client’s accountant regularly to ensure we are on the same page and limit the client’s need to liaise between us.

If you would like to work with a financial advisor in coordination with your accountant to build your Master Financial Plan, please contact Glenn Ayrton at ClearWealth Advisors at 604.687.6808 or <info@clearwealth.ca>.

Glenn Ayrton is registered as an Investment Advisor through Sora Group Wealth Advisors Inc., a Member of the  Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund (CIPF). This information is general in nature, and is intended for educational purposes only. For specific situations you should consult the appropriate legal, accounting or tax expert. This update is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any securities. The views expressed are those of the author and not necessarily those of Sora Group Wealth Advisors Inc.

SMJ