build wealth tax planning ebook[1]

8/12/2019 Build Wealth Tax Planning eBook[1]

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Your Guide to Building Wealth

Through Year-Round Tax Planning


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Copyright 2013

Farm Business Consultants Inc. (FBC)

All rights reserved. No part of this book may be reproduced, stored in a retrieval system,or transmitted in any form or by any means, electronic, mechanical, photocopying,

recording, scanning, or otherwise, without the prior written permission of the publisher.

Disclaimer

All the material contained in this book is provided for educational and informationalpurposes only. No responsibility can be taken for any results or outcomes resulting from

the use of this material.


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For many small business owners, tax planning means the once-a-year mad scrambleto organize all the necessary paperwork right before the tax ling deadline.

Sound familiar?

In reality, this is not tax planning. Real tax planning requires a holistic approach toyour nances and should be tackled year-round.

Whats the big deal? Why bother?

Money! Thats why. Your money and keeping more of it.

Through implementing a year-round approach to yourtax planning, youll be able to hold on to more of yourwealth.

This guide gives you the top 5 tips to building wealththrough tax planning:

1. Choose the best business structure for your company2. Ensure your investments are tax-optimized3. Safeguard your estate4. Plan for your childrens education5. Stay on top of your bookkeeping year-round

Your Guide to Building WealthThrough Year-Round Tax Planning


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Choose the best business structure

for your company

Tip 1:


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In the early years of your small business if you operate as a sole proprietorship orpartnership , you can deduct business losses against your other income. However, asyour business turns pro table, you might want to consider incorporation. This will protectyour personal assets from creditors. Additionally, there are several tax advantages toincorporating your business.

As an incorporated business, you could qualify for the small business deduction.This is the biggest corporate tax advantage of being a Canadian-controlled privatecorporation (CCPC). A CCPC receives particularly favourable treatment under federaland provincial corporate tax rates. In some cases, the income tax rates a smallincorporated business would pay are less than 50 per cent of the personal tax ratesthe owner would pay operating the business as a sole proprietorship.

Other tax advantages of incorporation:

Choose a non-calendar scal year that better suits your business cycles for incometax reporting.

Defer income withdrawals from the company from one year to the next. Create a registered pension plan and obtain tax-deductible group health and life

insurance plans for your employees and family members. Apply for cash refunds and/or tax credits for R&D through the Scienti c Research

and Experimental Development Program (SR&ED).


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Ensure that your Investments are

Tax-Optimized

Tip 2:


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The second tip to building wealth through tax planning is divided into 3 parts.Ensuring that your investments are optimized for the best tax situation takescareful planning, including special attention to the 3 pillars of tax-ef cient investing:

I. Income DeferralII. Income Splitting

III. Income Conversion


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I. Income Deferral

The most common tactic for tax-optimizing your investments is something referred toas income deferral. The bene ts of income deferral as a tax planning technique aretwo-fold:

1. Your marginal tax rate may be lower in the future.2. Deferring tax effectively discounts your nal tax bill.

Much of our retirement planning, such as the use of registered retirement savings plans(RRSPs), is based on this premise.

Your investments grow tax-free in your RRSP during your higher income workingyears. Then, when you retire and start withdrawing income that is taxable from yourRRSP, your income from all sources likely will be lower and youll be in a lower taxbracket .

The bene ts of income deferral also apply to short-term income deferrals, such asshifting a tax liability from one tax year to the next.

This strategy could be as simple as holding off sellingthose stocks that have accrued sizeable capital gainsuntil a later year when you think your income will belower.

You could also defer claiming an RRSP contributionuntil next year if you think you'll be in a higher taxbracket and would receive a higher refund.

Bene ts also arrive from longer-term income deferrals,which you can achieve by buying tax-shelteredinvestments such as ow-through shares.


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III. Income Conversion

With income conversion you can receive tax-advantaged rates in your non-registeredportfolio. Because different types of income are taxed at different rates you want toensure that your investments are getting the best returns and cash ow on an after-taxbasis. It's important to be aware of how the government treats the taxation of differentinvestment vehicles. For example, preferential tax treatment is given to investmentincome in the form of eligible dividends and capital gains.

Interest income is fully taxable in your non-registered accounts, just like any salary, netbusiness income and other regular income. However, Canadian dividends and capitalgains receive preferential tax treatment.

Dividends from Canadian

corporations are grossed up onyour tax return and a specialdividend tax credit applies. Thisgenerally means that dividendsare effectively taxed at a muchlower rate than regular income.

Capital gains are also

effectively taxed at a lowerrate - only 50 per cent of netcapital gains are included inyour taxable income.


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Tip 3:Safeguard your Estate


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In general, when a person dies, the law assumes that he sold his assets on the dayprior to his death, and there may be substantial capital gains on those assets. If so, theestate will have to pay tax on those gains to Canada Revenue Agency (CRA). However,if assets are left to a named bene ciary, tax consequences may be reduced.

With estate planning, you may be able to reduce the amount of probate fees andtaxes that your estate would otherwise pay. Consider the following:

JOINT ASSETSJoint assets, such as a joint bank account that two or more people own, or ahouse owned by two people as joint tenants, have a right of survivorship.This means that when one person dies, the other person or persons ownthe asset. So if you and another person own a house as joint tenants, thesurviving joint owner will get the house when you die. The house is an assetthat passes outside your will. No probate fees will have to be paid by your

estate regarding the house, and if the house is your principal residence, notax will be paid by your estate.

RRSPsA registered retirement savings plan (RRSP) is another asset that passesoutside your will if you name a beneficiary in your RRSP. If a spouse is namedbeneficiary there are no tax consequences .

TRUSTSDepending on the size of your estate, you might want to establish a trustbefore you pass away to protect against a will being contested as invalid orsubject to variation.


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Tip 4:Plan for your Childrens Education


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A registered education savings plan (RESP)is a great way to put away money for yourchildrens post-secondary education. Thereare two tax advantages to RESPs:

1. Although contributions to a RESP are nottax-deductible, the income accumulates ona tax-free basis year after year.

2. When your child uses the funds, the incomeportion is considered the child's income andis taxed at his or her low tax rate.

Plus, the federal government kicks in aCanada Education Savings Grant of 20per cent of what you contribute, up to amaximum of $500 per child per year toa lifetime maximum of $7,200 per child.

The concept of establishing an RESPis not so much a one-time tax decisionbut an overall strategy to provideeducational assistance to a child. Theearlier the plan is established the longerinvestment income can accumulate

and the more educational assistanceis available to the bene ciaries (yourchildren or grandchildren).


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Tip 5:Stay on top of your BookkeepingYear-Round


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Cramming for a test is seldom a good idea. Likewise, avoiding all of your bookkeeping

until the very last moment is not the best path to successful tax planning.Instead, keeping up-to-date with your bookkeeping all year-round will result in savingyou money and in plenty of other important bene ts:

Stop missing tax deductions

Sloppy bookkeeping may lead to overlooking tax deductions. Trying to remember all ofthe expenses you incurred as long as 16 months ago is virtually impossible.

By recording as you go, you will miss fewer deductions .

Keeping business and personal nances separate is an important component of yourtax planning. By not doing so, you risk overlooking a legitimate business expense orinadvertently claiming a personal expense as a business deduction.

Avoid CRA audits and penalties

Want to avoid an audit? Do your books.

Messy bookkeeping is one of the audit triggers that could get you audited. In theunfortunate case that you are audited, if your books are in good order, the CRA will beable to nish quicker letting you get back to work sooner.

The CRA advises that if you don't keep adequate records or don't provide them accessto your records, you may face penalties and/or sanctions.


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Keep a clear picture of your companys nancial health

If you dont have an accurate handle on your business income and expenses, how

do you know if youre actually making money? Monitoring cash in and cash out canhelp you make better decisionsbefore its too late.

Conducting monthly bank reconciliation allows you to catch any anomalies withyour nances before its too late. By October or November, take a preliminary look atyour potential year end and, if possible, move some of next years expenses into thecurrent year and delay income to next year to reduce your tax burden .

Besides, when it comes time to sell your business or secure capital to grow yourbusiness, being able to thoroughly document your past performance will help yourcompanys valuation.

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With over 20,000 farm and small businesses served by our 12 of ces in Ontario,Manitoba, Saskatchewan, Alberta and British Columbia, we know the importance ofmaking sure you get to keep every single penny that youre entitled to under the lawsof Canada when ling your personal and corporate taxes.

The correct approach to deciding which strategies to follow as well as diligencearound record keeping are the two magic ingredients of any sound nancial plan foryour business.

Last year, we saved $37M in taxes for FBC Members. If any of these strategies seemlike they might work for you, we invite you to talk with us: www.fbc.ca/contact-us orsee what a membership might look like for you and your business :http://www.fbc.ca/accounting-and-tax-services/build-my-membership

Remember, we come to you!


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[email protected]

www.fbc.ca

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