Chartered Accountants and Business Advisors mnp.ca Trimming taxes Alyson Kennedy CA January 26, 2009

Chartered Accountants and Business Advisors mnp.ca 2 Fundamentals 1. Structure your business appropriately 2. Know the rates of tax 3. Know the deductibility of expenses 4. Have a pre set remuneration strategy and a business plan 5. Plan for major life events- sale/ wind up/ succession 6. Have a great team and make sure they know your business. Banker, lawyer, accountant, insurance professional, financial planner 7. Measure your business activity accurately

Chartered Accountants and Business Advisors mnp.ca 3 How are taxes owing calculated? TOTAL REVENUE LessDeductible Expenses NET INCOME Plus/minus Other Income/tax deductible items TAXABLE INCOME Multiplied by Tax rates TOTAL TAXES Less Tax Credits TAXES OWING

Chartered Accountants and Business Advisors mnp.ca 4 Unincorporated Rate 46% 43% 36% 20% $0-40 $40-70 $ >$115

Chartered Accountants and Business Advisors mnp.ca 5 Can I deduct _____? Yes, if... Expenses are incurred to earn income Expenses are reasonable in amount Not, if... Personal or living expenses Capital Expenditures Denied by Income Tax Act

Chartered Accountants and Business Advisors mnp.ca 6 Expense deductions --- against self-employed income Accounting and legal fees Advertising and promotion Meals and entertainment (50%) Bank charges and loan interest ( Important to consider how your debt is structured) Operating expenses Salaries Your equipment – C.C.A. Automobile and travel expenses Cell, pager, internet etc. Maintenance & repair of office + equipment Professional development

Chartered Accountants and Business Advisors mnp.ca 7 Expense deductions --- against self-employed income (Cont ’ d) Only deduct 50% of meals/entertainment Insurance- must be owned by corporation/ assigned to bank Specific prohibition for... – recreation facilities – certain club dues ( golf) Record client names on receipts (privacy rules)

Chartered Accountants and Business Advisors mnp.ca 8 Good Tax Planning Includes Income Splitting: Spousal Pay spouse ( children) an appropriate salary Higher-taxed spouse pays all family bills Lower-taxed spouse invests his/her annual earnings Spousal RRSP- less important with pension splitting

Chartered Accountants and Business Advisors mnp.ca 9 Save for your taxes As an employee you have tax deducted No taxes will be deducted from self employment Set aside 30-35% Use short-term stable investments (like money fund)

Chartered Accountants and Business Advisors mnp.ca 10 Maximize benefits you receive from your accountant Be an accurate ‘ historian ’ – General understanding of tax issues provide relevant information – Example: types of deductible expenses Communicate during the year decision ‘ deadline ’ - December 31 lease vs. buy financing purchases Onus is on taxpayer to support expenses claimed – any unsupported expenses can be disallowed – Communicate during the year decision ‘deadline’- December 31 lease vs. buy financing purchases “Personal type” – double onus

Chartered Accountants and Business Advisors mnp.ca 11 Incorporation An incorporated business is: Separate legal entity You are an employee of your company – Will receive a T4 slip ( Tip- consider EI eligibility of family) Tax rate: 12% on “ qualifying “ income up to $400,000 in Manitoba Primary advantages: – Legal liability limitation – Tax deferral – Capital gains exemption – Income splitting

Chartered Accountants and Business Advisors mnp.ca 12 Unincorporated $0-40 $40-70 $ >$115 Rate 46% 43% 36% 20% $46,000 $19,000 $11,000 $8,000 $84,000

Chartered Accountants and Business Advisors mnp.ca 13 Income splitting using dividends Corporation pays salary to owner Then pays tax on its remaining earnings at a rate of 12.0%... Then pays dividends to spouse and adult children (and their spouses) – no ‘ reasonableness ’ restriction

Chartered Accountants and Business Advisors mnp.ca 14 Owner manager remuneration- how much? Factors Lifestyle RRSP ( $116,667 for $21,000) CPP ( $42,800) Disability Vs Dividends? Consider “ reasonable” tests etc

Chartered Accountants and Business Advisors mnp.ca 15 ‘ Incremental ’ Dividends $0-30 $30-50 $50-95 >$95 Rates 35% 30% 20% 5%

Chartered Accountants and Business Advisors mnp.ca 16 $215 Unincorporated $100* (12) *Corp $215 (115)* *owner $88* *Spouse/Child * Taxable Replace with

Chartered Accountants and Business Advisors mnp.ca 17 $215 Corp Income $100 (12) $88 Salary $115 Personal $14,000 Corporate $12,000 Tax if Unincorporated $84,000 Incorporate d Incorporate d: Dividend $88 $64,000 Personal $38,000

Chartered Accountants and Business Advisors mnp.ca 18 Personal $ Dividend $88* Replacewith Corporate $100 (12) Savings: $20,000 (46%) $46,000 (12%) $12,000 Tax on Dividend $14,000

Chartered Accountants and Business Advisors mnp.ca 19 Incorporation Secondary advantages: - Individual Pension Plans – Health and Welfare trusts – Salary vs. dividend flexibility – Tax Certainty To Consider – Additional complexities: costs and administration – Passive investment income-doesn ’ t qualify for small business rate

Chartered Accountants and Business Advisors mnp.ca 20 The family trust Relationship whereby trustees hold assets for beneficiaries Shares of corporations can be owned by a family trust Allows a deferral of estate planning decisions Allows income splitting, as trusts are often discretionary (cannot allocate income to minors) Allows the multiplication of the capital gains deduction May offer marital property protection, shares held by discretionary trust difficult to assign value to Required to dispose of property every 21 years at FMV

Chartered Accountants and Business Advisors mnp.ca 21 Incorporation Get professional help from an accountant to set up your business properly from the start! Keep proper books and records Separate business bank accounts from personal accounts Keep track of all revenue and expenses Always save money for your tax installments

Chartered Accountants and Business Advisors mnp.ca 22 Important tax incentive available to corporations 1. Scientific Research tax credits 2. Manitoba ITC’s – manufacturing equipment 3. Apprentice tax credits for training staff 4. Fast write offs for manufacturing and computer equipment 5. Consider leasing

Chartered Accountants and Business Advisors mnp.ca 23 Remember “ It ’ s not what you earn, it ’ s what you keep ” Any Questions?