10 Best Tax Tips
Below, we have listed the 10 Best Tax Tips for individuals, business owners and investors.
Tip # 1 – Payment of Dividends vs. Salary
As your Accountants, we can help you evaluate whether dividends or salary are better for you given your situation. Generally speaking, dividends have a lower tax rate than salary, are not subject to social security tax (CPP) and the first $38,000 of dividends can be received tax free.
Tip # 2 – Tax Free Shareholder Loan Repayments
Shareholder loans can be repaid tax free. Therefore, before you pay yourself a salary you should repay any shareholder loans owing to you. You should discuss this strategy with your current Accountant.
Tip #3 – Loan to Spouse
Are you tired of paying too much tax on the profits generated from your investments?
If yes, then consider lending money to your lower-income spouse, so that he/she can purchase investments that you would have otherwise purchased yourself. By doing so, the profits generated from the investments will be included in your spouse’s taxable income, instead of yours, thereby reducing the amount of tax paid.
However, you must charge interest on the loan to your spouse at the CRA’s prescribed rate, which is presently only 1%. Therefore, as the higher income spouse, you will have to include a nominal amount of loan interest in your income.
As your accountants, we know that it’s a great time for you to take advantage of this income-splitting strategy, as interest rates are at an all-time low.
Tips #4 – Gift to Children
Consider gifting property to your children that will appreciate in value, such as stocks. While income from the property gifted to your children will be included in your taxable income, any capital gains realized will be taxed in the hands of your children. Since your children are in a low income tax bracket, they shouldn’t pay much in tax on those gains.
Tip # 5 – Minimize Tax by Incorporating
Corporations pay a low rate of tax of only 13.5% (combined Federal and BC rate) on the first $500,000 of profits, as compared to individuals who at the highest tax bracket pay income tax at a rate of 46.4%. Therefore, by incorporating your business, you could potentially save over 30% in tax.
If you are already incorporated, then you should consider deferring tax by leaving as much of the profits as you can inside the corporation. The reason being is that when profits from the corporation are paid to you personally, you must pay tax on the amount received at a rate of tax which is normally higher than the corporate tax rate. For example, if you are in the highest income tax bracket of 46.4%, then you would save over 30% in tax on the funds that are retained inside the corporation and not paid to you.
Tip #6 – Employee Home Loan
There are special provisions in the Income Tax Act that allow your corporation to make a loan to you, so that you can purchase a home.
This is a great way of financing your new home purchase by using the funds in your corporation, and without paying any tax. However, you must repay the loan to your corporation over a specified period of time and your corporation must charge a specified rate of interest to you on the loan.
Tip #7 – Dividend Sprinkling
If you are a business owner and are tired of paying too much in tax, then this strategy may be for you.
Dividend Sprinkling is a form of income splitting, in which profits from your business are paid as dividends to yourself and your spouse, instead of only being paid to you. By splitting the income of the business between yourself and your spouse, the overall tax paid is minimized.
In order for your company to pay your spouse dividends, he/she must be a shareholder.
Tip # 8 – Pay Salaries to Spouse and Family Members
If you are a business owner, you can pay a salary to your spouse or family members for the work that they perform in respect of your business. The salaries paid must be reasonable, otherwise they may be challenged by the CRA.
You should also consider documenting the job responsibilities and rate of pay (e.g. $X per hour) of your spouse and/or family members, so that you can justify the salaries paid, in case they are challenged by the CRA.
Tip # 9 – Tax Free Automobile Allowance
Your corporation can pay you a tax deductible automobile allowance of 52 cents per KM for the first 5,000KM and 46 cents thereafter, for the kilometres that you drove your vehicle for business purposes. The allowance that you receive is not taxable to you and is tax deductible to your corporation.
Tip #10 – Interest Deduction
Interest that your business paid on a loan or line of credit is tax deductible by your business, if the proceeds of the loan or line of credit were used for business purposes.
Where you personally borrow money from a bank or other institution and in turn lend that money to your corporation, consider charging interest on the loan to your corporation. The reason being is that your corporation would be allowed to deduct the interest paid to you.
The interest income received by you from your corporation would be offset against the interest that you paid to the bank, therefore resulting in no tax consequences to you.