If you are the owner of a private corporation you should be concerned about the commentary that is coming from the Department of Finance. In the Federal Budget of March 2017, Finance expressed their concern that private corporations were being used by high income Canadians to obtain tax advantages that were not available to other Canadian tax payers. That concern has led to the release on July 18th 2017, of a consultation paper along with draft legislation. Finance is currently asking for input from interested parties and stakeholders and has stated that the consultation period will end on October 2, 2017. At this point, whatever happens after that date is anyone’s guess, but speculation is high that changes will be introduced to close what the Department perceives as abusive practices relating to private corporations.
Specifically, there are three specific tax planning strategies employed by private corporations that the department is most concerned with:
Sprinkling income using a private corporation
Income tax paid on income from a private corporation can be greatly reduced by causing that income to be received in the form of dividends by individuals who would pay tax at a much lower rate or not at all. These dividends are usually paid to adult children or other family members who are shareholders of the private corporation or to a family trust. By “sprinkling” the income in this manner the amount of income tax paid can be greatly reduced. Read more
Many business owners are unaware that corporate owned life insurance combined with the Capital Dividend Account (CDA) provides an opportunity to distribute corporate surplus on the death of a shareholder to the surviving shareholders or family members tax-free.
Income earned by a corporation and then distributed to a shareholder is subject to tax integration which results in the total tax paid between the two being approximately the same as if the shareholder earned the income directly. Integration also means that if a corporation is in receipt of funds which it received tax-free, then those funds should be tax free when distributed to the shareholder.
The Capital Dividend Account is a notional account which tracks these particular tax-free amounts accumulated by the corporation. It is not shown in accounting records or financial statements of the corporation. If there is a balance in the CDA it may be shown in the notes section of the financial statements for information purposes only.
Generally, the tax-free amounts referred to, are the non-taxable portions of capital gains received by the corporation and the death benefit proceeds of life insurance policies where the corporation is the beneficiary. Read more
If you are the owner of a successful company it is likely that you have retained profits or surplus cash in your corporation. If this is the case, chances are also good that this invested surplus is exposed to a high rate of corporate income tax. If this describes your company then you may be a candidate for the Corporate Estate Transfer. This strategy provides tax sheltered growth as well as maximizing the estate value of your company upon your death.
What is a Corporate Estate Transfer?
The Corporate Estate Transfer is an arrangement in which the company purchases a tax exempt life insurance policy on the life of the shareholder using corporate funds that are not needed for immediate business purposes. In doing so, the transferred surplus grows tax-deferred while the death benefit of the life insurance policy increases the value to the estate when the shareholder dies. Read more
Most business owners understand that assets vital to the success of the enterprise should be insured. Premises are routinely covered for fire and/or theft; vehicles used to make deliveries, insured; machinery needed for manufacturing, also insured. Given that these tangible assets are instrumental in the success of the business, it makes good business sense that the business is protected in the event of a loss. But what about key employees? Many business owners overlook the impact on their business should a key employee die unexpectedly.
If you own or manage a company whose continued success is dependent on key people (it might even be you), it would be prudent to insure all key personnel whose death or incapacity would negatively affect profitability. Key persons are those who contribute to the continuing success and profitability of the enterprise.
What happens when an owner or key person dies or becomes disabled? Read more