There are many Tax effective ways to Take Money Out of Your Business. When planning for a family small or medium sized business group, the main consideration is how much ends up in the family unit’s pocket. Here are three strategies to consider.
1. Declare a Dividend to a Lower Income Shareholder (includes kids over 18)
This is a great way to split income or pay for children’s post-secondary education. Consider the Taxes payable for one person making $120,000 verses three people making $40,000. There can be almost no Personal Tax (T1) owing on a $40,000 dividend when taking advantage of various credits.
The initial set up to accomplish this is important. You do not want to confer a benefit if your spouse or children are not already shareholders – if that is the case some planning can help alleviate this risk as there are still ways to get them in. Proper planning is necessary and varies depending on circumstances. Essentially and for the most part different classes of shares for each family member would provide the most flexible of plans
This strategy considers that dividend income is first Taxed at a corporate level – as such, shareholders can claim a Tax credit to offset Personal Taxes. The shareholder receiving the dividend may claim a grossed-up amount of income based on the approximate corporate taxes paid, and the dividend credit returns some of this inflated amount.
And the nice part is you do not have to justify family members working within the firm for this to work as is the case of paying wages. However, in the initial stages you would want to document how they purchased those shares so as not to be subject to various attribution rules.
2. Utilize the Capital Dividend Account (CDA)
The capital dividend account is a great way to find Tax free money from a corporation. This is achieved from capital gains from previous years and often missed or forgotten. A capital gain is a profit that results from a disposition of a capital asset, such as stocks, bonds, real estate or equipment. As is the case with individuals, 50% of any Taxable capital gains generated inside a corporation is taxable. The remaining 50% goes into a capital dividend account. These capital dividends can be distributed to shareholders Tax free. To achieve this, your accounting firm like Accountable Business Services (ABS) ABSPROF will need to complete and file an election with CRA (have a professional do this for you). Our firm has found a number of new clients who bring us their Tax Returns (T1 & T2) for a second opinion – where we find them this Tax free money.
3. Refundable Dividend Tax on Hand
Investment income earned inside a corporation (excluding capital gains), are credited to the Refundable Dividend Tax on Hand (RDTOH) a Canadian Income Tax Act, account (25% – 33%). The company is able to recover 1/3 of every taxable dividend dollar it pays out against this account. This is so because the company has already paid (part IV) Tax in prior years.
There are different types of dividends at this level and the proper dividend has to be declared to get the maximum refund. Our firm has found a number of new clients who bring us their tax returns for a second opinion – where are able get them Money Out of their company and trigger this Tax refund.
While these are just three Strategies for Tax efficient ways to Take Money Out of Your Business, it goes to illustrate what prudent and efficient tax planning can do for you.
Accountable Business Services (ABS) ABSPROF is a leading Accounting and Tax Services Firm in Alberta, providing low price but high quality Accounting and Tax Services in Edmonton, Calgary and Red Deer. Feel free to Contact Us on our Toll Free Number: 1 (888) 556-7864
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