A prominent Canadian economist recently conducted a study revealing tax loopholes that annually cost the government about $16 billion. Most of the foregone revenue, 90% of which benefits the top 10% of earners, is attributed to capital gains on investments that are taxed at about half the rate of wages. Tax laws are being scrutinized by the Canada Revenue Agency, but that analysis shouldn’t deter small business owners from taking advantage of the current revenue codes. Many legitimate strategies remain to lessen the bite of the CRA. Educate yourself or find a good accountant who can explore ways to increase your bottom line. Consider the following three methods to cut the amount of taxes owed when the fiscal year ends or when your business is sold or dissolved.
Outsized Charitable Donations
Charitable donations are a typical way to reduce tax bills, but imagine that for each dollar you give, you receive a receipt for four times the amount of the donation. Through a series of complex offshore maneuvers, gifted trust arrangements meted out $175 million in charitable receipts to about 6,000 taxpayers. The little-known, but intensely scrutinized, program involves only a few select charities that receive income streams over 20 years from a percentage of donations parked in a hedge fund. The organizer of the trust arrangement, despite warnings from the CRA, maintains that the strategy will hold up against any legal wrangling. While this tax avoidance approach, known as Donations for Canada, remains legal, there is a good chance that it gets pushed to the other side of the spectrum. Thus, any taxpayer considering this scenario should proceed cautiously.
Incorporation and Succession Plans
By incorporating, you can distribute shares of the business to family members or a trust set up for their benefit. The primary objective of an estate freeze is to avoid significant capital gains levied on the owner at death. If your timing is early enough, and you expect the business to grow in value, the appreciation in the company can be attributed to shares held in the trust. At the same time, the value of the shares that represent ownership interest technically stay the same or “freeze.” This arrangement limits the amount of the business owner’s capital gains tax and exempts up to $813,000 from taxes per family member upon the sale of the business or the death of the owner.
Small business often means family business, and it is common for owners to employ spouses or children. While it is a good idea to keep the daily business operations in trusted hands, this strategy also offers a means to save on taxes. The two principal methods of drawing income from the business are taking a salary or paying yourself dividends, both of which are taxed at rates that are presumably higher than a spouse or child. So, be generous to your cherished employees. The more money you funnel through them, the fewer dollars you owe to the CRA.