There are a number of opportunities for tax reduction many business owners overlook. A few examples are highlighted on this page.
Invest at the Corporate Level
Most business owners who are able to save and invest will have the best after-tax results by investing any funds available within a holding company, rather than taking income in person and investing in an RRSP or other registered account .
Income from an active business is taxed at a low rate for businesses earning $500,000 or less. In 2014, this rate was 12.5% in BC. Compared to an approximately 43% tax rate on the highest tax bracket, this results in a 31% tax deferral opportunity.
Passive income in corporations is attractive, and provides a mechanism for eventually distributing funds to the shareholders (i.e. in retirement) in a tax-efficient manner, more attractive than income from a RRIF. Generating dividends and capital gains from investments within a corporation actually provides an opportunity to extract funds from the corporation while attracting less tax.
Reduced Payroll Taxes
By taking dividends rather than income a business owner can reduce payroll taxes like CPP and Employment Insurance
Reducing Corporate or Personal Taxable Income
If a business owner is receiving taxable income rather than dividends, or their corporation is earning more than the $500,000 Small Business Deduction, Flow-Through Limited Partnerships can provide tax deductions for either the business or the business owner.
If the business owner buys the Flow-Through Limited Partnerships, they can transfer them to their corporation and retain the cost base. This would be advantageous if there were an opportunity for income splitting with lower-income members of the family, such as adult children attending university or a spouse in a lower tax bracket.
A business owner can split income with spouses or adult children if their corporations are set up correctly.
Savings funds in a corporation while children are minors can be an effective strategy, as the children can take income while they are low-income adults (i.e. while attending university).