Ensuring taxation on investments inside a corporation are minimized
Gains on investments held inside a corporation are taxed at a relatively low tax rate. It’s important to keep this in mind when determining not only the asset allocation of your corporate portfolio, but also the products you hold inside them. As in non-registered accounts, profits made from interest are 100% taxable, while only half of the capital gains, for example, are taxed. This gives you an incentive to have a higher percentage of capital gains bearing investments in your corporate investment account, so long as you are comfortable with the investment risk. Further to this point, there is a tax advantage to using “corporate class” equity mutual funds as you can transfer from one equity fund to another without triggering taxes in the corporation. You will eventually have to pay the taxes on these funds, but not until you are ready to.
Smooth out income over good and bad years
Owning a business can be a volatile experience. Some years your business will be very strong, others may be a little slower. Given this, in a year your company does well, it often makes sense to keep a surplus of funds in the corporation as opposed to paying out a big salary each year. This lowers your tax bill in the strong years while leaving a reserve for future years that may not be as profitable. This often lowers the average percentage of tax you pay over a number of years.
Use dividends to pay for children’s education through your corporation
Most entrepreneurs think the best way to help pay for their children’s post-secondary education is through RESPs. Although the maximum $500 grant per child is a powerful tool that should be utilized, it may not always be the best option. In order to take advantage of RESPs, entrepreneurs need to use after-tax dollars, which are often taxed at up to 49% depending on your income. Another approach may be to incorporate, and pay dividends to the children when they reach university age (18 years or older), having the income taxed in the children’s hands instead of your own. This can mean $0 in taxes paid on the dividends as the children usually do not have any other significant sources of income. This strategy can often save thousands of dollars in tax.
Family Trust/ $750K lifetime capital gains exemption
Entrepreneurs rarely consider the sale of their business to the extent that they should. For example, few people realize that when they sell their business, at least the first $750K of capital gains could be exempt from tax... as long as they take the steps needed or have their company structured in the right manner to ensure this is possible. With the use of a family trust, you could have multiples of the $750K capital gains exemption applied by using the capital gains exemptions of other family members.
Income split with family members…..reasonable salary for spouse/kids salary
When most people think of the tax benefits of incorporation, it is usually income splitting that comes to mind. If one of your family members legitimately works in your business, you can pay them a salary for the work they do. This should be thought of less as income splitting and more as hiring someone to provide a service to your company.
Health and Welfare Trust (HAWT)
Medical expenses for your family can often cost an arm and a leg. Setting up a HAWT can allow a small business owner to deduct personal medical expenses (such as dentistry, orthodontics, or physiotherapists) by using pre-tax corporate earnings. This is a powerful strategy that is one of the major benefits of having a corporation.
Although not recommended for every entrepreneur, there are instances in which a shareholder can take a loan from their corporation for a specific purpose like a home purchase or a car used for business. The loan should be structured as a specific arrangement where the funds are repaid over a ‘reasonable’ length of time. The interest rate must be equal to the prescribed rate of the loan back to the company.