1. “ Tax Talk ” Or How to Minimize Taxes for The Self-Employed By Leslie Slater, CA, MBA

2. Topics to Be Covered Similarities and Differences between incorporated businesses, and unincorporated Income taxes Ownership structures Paying yourself Paying family members Taxation of profits

3. More Topics Expenses of car, home office, meals and entertainment, travel, etc. Health Spending accounts IPP’s CPP, GST, PST SRED and other government programs

4. Final Topics Salary/Dividend Decision New Dividend Tax Credits Should you incorporate? Your employees – how can you help them and yourself

5. Incorporated Companies Separation between you and your company Ownership can be you, other business partners, your spouse, adult kids, a family trust, other corporations Corporation pay its own federal and provincial taxes separate from you You are paid salary/bonuses & dividends

6. How are you really paid? If draws due to inconsistent cash-flow, then need to either show self-employment income or dividends Don’t want it to be a series of loans and repayments Company then doesn’t pay employer CPP Shareholder loans/draws need to be zero at end of your fiscal year

7. Important Tax Rates CCPC are charged 18.6% in Ontario on first $300k of active business income – then pay dividends after corp tax Increasing to $400k January 1, 2007 Ontario lowered rates on $400k so there is a another tax bracket – 26.3% Over $400k, pay 36.1%-40.8% on ABI

8. New Dividend Tax Credit For dividends paid out of earnings not subject to federal small business rates or investment income (after Jan 1, 2006) So not relevant to the salary/dividend decision below $300k (moving to $400k)

9. Salary versus Dividends At all levels of corporate income, there is deferral of taxes for income left in the company and invested since corp rates are less than personal rates But will pay high taxes on the investment income unless pay it out to shareholders Ultimately about 3% less taxes by paying dividends versus salary And salary attracts CPP, EHT

10. So how do I make the decision? Generally bonus down to SBD until 2010 when rate changes may make you neutral Below SBD, pay dividends unless you are already below SBD before start If below $300k when you start, do you pay dividends or salary?

11. Salary, dividends or leave it in? Salary is earned income for RRSP, subject to CPP, part of EHT calculation on total payroll Considered for debt servicing levels So generally pay tax until reach levels for desired RRSP and debt servicing Max 2006 $106k x 18% = 19,000 if desired

12. Leave it In? Tax deferral –i.e. no personal taxes yet But need to watch how big your investment assets get – 50% of assets for 2 year, 90% Income on investments taxed at high rates if not needed during business cycle Refundable taxes if pay out dividends ($1:$3 ratio)

13. So The Decision Leave cash in the business if don’t plan to sell within 2 years, below the $300k (soon 400k) and you are at your desired earned income levels but watch you don’t build up too much Have income split to lower tax brackets with family members

14. Income Splitting with Family Can pay high reasonable amount for work done Have to actually pay them; and get invoices if they are contractors Spouses can be partners or shareholders Family Trusts can be partners or shareholders

15. Income Splitting Cont ’ d Sole proprietorship – pay for work done Partners – + allocate partnership profits Shareholders – dividends (but not to minor children), duplicate capital gains exemption if sell shares (but need to pay them) Many considering everyone in a family trust for maximum discretion on allocations

16. Similarities between Corp & Other Paying family members for work done Home office as principal place of business Meals and entertainment Travel GST, PST

17. Differences Car Paying family owners Health spending accounts vs group medical CPP SRED and other government programs IPP’s

18. Home Office Principal place of business; all costs (except mtg princ) x sqft/sqft or #rooms Consider market rates to charge incorp co Rental income on your personal tax return Lease with company If not princ. place, then regularly and continuously meet clients there and exclusive business use (court cases)

19. Meals and Entertainment 50% deductible by company or self- employed 50% for GST Input tax credits Keep track of who you entertained on the receipt to show business purpose Don’t want to be shareholder appropriations if incorp; double taxation

20. GST Need to register where >30k last 4 quarters Start usually as annual filer and remitter Move to quarterly remitter or filer based on first year If have a refund always (e.g. US sales and Cdn costs), then want frequent filing CRA doesn’t like sending big refunds

21. GST cont ’ d Value added tax – difference between amount charged and amount paid Have to keep track to both unless use other method Quick method – $200k limit 6% as of July 1, 2006 changed rates for calculations

22. GST over the Internet If US resident – zero-rated but you have to have declaration from them What are you selling – an intangible or a service (software can be either) If wholly outside Cda, not required on service If intangible with right to use in Cda - GST

23. PST Sales tax, not value added tax Consider all items that go into your product E.g. software companies might provide owners with CD’s, paper manuals, use development computers and can buy these without PST

24. PST over Internet How and where delivered If delivered electronically, servers outside Ontario and can’t download in Ontario, then no PST If can download in Ontario, then PST If delivered in other provinces, may have HST (BC based on if you do direct advertising) Complicated so check it out

25. Car If self-employed, write-off the business proportion of all your auto costs (s/t max $800/mo, 30k cost) If corporation, then difference if company owned or leased (taxable benefit) versus personally owned or leased If personally owned or leased, can charge company.50/km first 5,000 and $.44/km over and no taxable benefit or chg allowance (taxable income)

26. Health Spending Accounts Health Spending Accounts only available to corporations You make a contract with your company to cover list of medical expenses and put a set monthly amount in separate bank account each month until employee submits the medical expenses and gets reimbursed Account is not considered part of company books

27. Health Spending (cont ’ d) No maximum, but should do set monthly amount Unlike group premiums for self-employed where get to deduct $1,500 for self, $1,500 for spouse and $750 each dependent child from business income (not incl life, ltd) Need to establish for all employees Monthly amounts are deductible to co; not taxable benefit to employee

28. CPP If incorporated, then company pays employer portion of CPP Self-employed pay both sides when file their personal tax returns – 9.9% of 42,100, max $3,821 in 2006 If within 15 years of retirement, want to ensure that you are maximizing your CPP contributions Can receive as early as 60 (reduced); normal 65

29. SRED SRED is Scientific Research and Experimental Development Only available to corporations Important cash incentive to software companies & manufacturers in Cda where contribute to tech advancement and where there was tech uncertainty Pays $ even if don’t pay any income tax Approved SRED can be collateral for bank loan

30. Other Government Programs Mainly focused on corporations Some provide cash even if no taxes, some match funds (e.g. IRAP) and some provide income tax credits against taxes payable Ontario has some focused on media Also, there are government funds looking to encourage innovation

31. IPP (Individual Pension Plan) Can define a smaller group (you, your partners, but not general employees) to be covered Corporation - need employee relationship IPP’s useful to accumulate larger amts than RRSP’s, get company deduction, if around 50, steady corp. cash-flow, and have been running the corp. for a number of years Companies will calculate benefit and consult for free; set up costs coming down

32. So Should You Incorporate? If you make more money than you need or want to live on – yes, tax deferral at least If there is liability risk – yes, corporate veil If there are contracts which are not assignable If you have income splitting opportunities with spouse and/or children

33. Incorporation Advantages If you think you qualify for SRED or other government programs If you think you’ll be in business for a while and ultimately sell – capital gains exemption If you might want do retirement planning (IPP’s) or health spending accounts

34. But what about your employees? How can you help them to minimize their taxes? Specify in employment contract that they need home office (e.g. technology workers) with internet connection, cellphone, and personal computer; car also Give them a T2200 to write off these against their employment income

35. Other Ideas for Your Employees? If they negotiate contracts, pay some of remuneration as commission and specify as such on T4 slip Commissioned employees have more write- offs than salaried – even their fees for income tax preparation If they pay part of their benefits, specify it covers the life and long term disability part

36. To Conclude When you start a business, you may not incorporate, so you can write-off losses against your personal income…but if the business is going to continue, it usually makes sense to incorporate There are more opportunities for tax deferral, income splitting, estate planning, health care deductions, retirement planning, etc. So make sure you are getting all the possible advantages