As an owner of an active business through a private Canadian corporation, we understand the importance of effective tax planning. Here's a helpful tax planning checklist tailored to your business:

1. Compensation Strategies

• Consider paying lower-income family members a reasonable salary or bonus to leverage their lower marginal tax rate based on the duties they perform for the business. This may allow you to take advantage of their lower marginal tax rate, as well as create RRSP contribution room and CPP pensionable earnings.
• Explore paying bonuses to employees to optimize the company's taxable income within the business limit. The business limit for most provinces is $500,000. Active business income up to the limit will be taxed at a lower rate of 12.2%. Active business income over $500,000 will be taxed at the higher rate of 26.5%.

2. Dividend Opportunities

• Explore dividend payments to your spouse and adult children, considering tax implications and TOSI rules. If TOSI applies, the dividends paid to your family members will be subject to tax at the highest marginal tax rate, making this income splitting strategy ineffective. There are exclusions from the TOSI rules, which differ depending on the age of the family member receiving the income. The exclusions depend on whether your family member is significantly involved in the business or owns a certain portion of the votes and value of the corporation's shares.

3. Employee Profit Sharing Plan (EPSP)

• Explore the benefits of an EPSP for employee compensation. Your corporation would receive a tax deduction for EPSP contributions and the employer EPSP contributions are taxable to the employee as employment income.

4. RRSP Contributions

• Use corporate funds for RRSP contributions, benefiting from tax deferral and an offsetting RRSP deduction.

5. Corporate Surplus Withdrawal Strategies

• If you need the corporation’s surplus funds for personal use, consider using the following strategies first to get funds out of a corporation tax free before paying a taxable salary or dividend:
  • reimburse yourself for business expenses you paid personally.
  • repay amounts owed to you by the corporation.
  • pay capital dividend; and
  • reduce the amount of paid-up capital (PUC) on your shares by returning the PUC to you as tax-free return of capital. The PUC of your shares represents the consideration your corporation received in return for the shares it issued to you.

6. Succession Planning

• Consider corporate owned life or disability insurance to fund buy-sell agreements, provide cash flow in the event of disability or death of a key person and shelter surplus investment income from tax.
• Explore an estate freeze to cap the value of your assets (i.e. or shares), and transfer the future growth of your assets, and their associated tax liability, to the next generation. An estate freeze may allow your family members to use their Lifetime Capital Gains Exemption (LCGE) to shelter the capital gains arising on a future share sale from tax. In 2023, the lifetime capital gains exemption is $971,190.

7. Monitoring Qualification for Capital Gains Exemption

• Regularly monitor the company's assets to ensure qualification for the lifetime capital gains exemption.
• One of the tests to qualify is that throughout the two years before the sale, more than 50% of the fair market value (FMV) of the company’s assets must have been used in an active business carried out in Canada. In addition, at the time of sale, at least 90% of the fair market value of the assets must be used in an active business in Canada.

If you're interested in implementing any of these tax-saving approaches or have questions, please reach out to our team. We're here to help you navigate the complexities of tax planning and ensure the financial well-being of your business.

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