If Ottawa’s recent tax changes for private companies prove that nothing is new when it comes to onerous regulations, Manning Elliott demonstrates that there is a need for evolving solutions to mitigate the impact.
Ryan Vanderpol (right), senior manager for Manning Elliott’s Surrey office, explains: “While Ottawa’s changes to passive and split income rules are the biggest changes in 30 years for private businesses, we at Manning Elliott have formulated six strategies private businesses need to consider. All these tips are familiar and quickly coming back into vogue as a result of the federal government’s aggressive stance.”
Under the new rules, private companies with passive income—such as rental income, capital gains, dividends, and interest—will pay more tax on their active business sources of income when that passive income exceeds $50,000. The tax on split income (TOSI) rules provide that if you distribute income from your business to related parties who are not active in the business, they will be taxed at the highest tax rate on that income, unlike in the past.
Some of Manning Elliott’s strategies are suitable for middle-aged earners, including the employment of RRSP bonuses. “If you’re already taking a wage, then declare a bonus—and if paid directly from the company to your RRSP plan, you avoid withholding tax and qualify for a corporate deduction,” says Vanderpol. “But timing for this is critical: you must consult with your advisor to co-ordinate the income inclusion and deduction properly.”
Another familiar strategy for business owners approaching retirement years is to consider setting up an Individual Pension Plan (IPP), administered by a third party and established for the benefit of the owners. “IPPs can result in larger contributions than are available under the RRSP rules,” says Vanderpol, who adds that contributions to the IPP will result in a deduction for the company when made and result in income for the beneficiary when drawn from the plan in their retirement years.
Manning Elliott’s third strategy is aimed at TOSI. “Changes can sometimes be made to the ownership of a company reducing the impact of TOSI,” says Vanderpol. “Several options are possible and must be discussed with an advisor.”
Changes in corporate structure or reducing investment income by changing the nature of the passive assets are possible ways of combatting the effects of the new passive income rules, and they count as Manning Elliott’s fourth strategy to consider this tax season.
Next comes the possibility of enacting an estate freeze by restructuring the ownership of the company. “The value of any new growth can be passed on to the next generation while the existing owners retain control of the business,” says Vanderpol.
Finally, Vanderpol cites using low-interest rate loans to a lower income spouse for the purchase of income producing assets as a way to combat Ottawa wringing more tax dollars out of Canada’s business sector.
Manning Elliott LLP is one of the province’s largest independent regional accounting and business advisory firms with offices in downtown Vancouver (604-714-3600), Burnaby (604-421-2591), Surrey (604-538-1611), and Abbotsford (1-604-557-5750). The firm has been around for more than 60 years and employs over 200 professionals and staff.
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