We typically separate tax planning into two stages, prior to establishment and after establishment of the company.
Before setting up a company, it is advisable to prepare a business plan and then discuss with a professional on whether it is necessary to set up a company at this stage.
According to the business plan, find a professional accountant to discuss the tax types and rates that may be involved, including turnover tax, income tax, customs duties, etc. Fully understand all the deductible expenses allowed by the tax law during a business process before tax budgeting.
If the company intends to pay salary to family members, it must be able to pass the plausibility test from the CRA, including work content, investment funds and shared risks. Especially for family members aged 18-24, it is recommended to write a work log or periodic work report to prove that the family member is indeed working for the company.
For investment assets in the name of the company, for instance used as rental housing, it is necessary to consider the possibility of hiring more than 5 employees soon while managing the property in house to evaluate tax rate deduction feasibility. Try to use payroll, interest payment, accumulate asset depreciation, and other possible methods to reduce company profits since the tax rate for passive income is rocket high.
After the establishment of the company or when the company’s operating conditions change, you should consult an accountant immediately for guidance. Documents required and deductible expenses across different business vary. Generally, in addition to the costs directly related to the company’s business, the below expenses can be considered for deduction:
- Office and home supplies
- Business Vehicle expense
- Mobile expense
- Customer Hospitality Expenses
- Travel expenses
- Employee medical and health insurance
- Professional membership fees paid by the company with the company as the main income object
- Social club membership fees paid by the company with the company as the main income object
- Meals for non-recurring overtime work for more than 2 hours
- Party allowance for all employees below 100 per capita
- Physical gifts and rewards valued under 500 for holiday or birthday uses.
If the company intends to pay salaries or dividends to shareholders, it is best to balance the personal tax and corporate tax based on the personal income of the shareholders, in order to achieve the lowest tax burden. The following factors can be considered:
- Whether the company has accumulated losses from previous years that can be used to deduct the current year’s corporate income tax – if so, consider dividends;
- Does the company have a balance in the capital dividend account (CDA) – if so, consider dividends;
- Does the individual want to make RRSP contributions? – If so, consider salary.
Under normal circumstances, for companies with stable income (such as trading, retail, restaurants, manufacturing, etc.), we will consider paying part of the salary to shareholders and consider dividends at the end of the year. For companies with unstable income (such as investment companies, etc.), we will consider dividends at the end of the year according to the company’s profitability or consider returning shareholder loans first.
We generally do not recommend investing in stocks or funds for cash in the company’s bank account, since the annual investment income exceeds CAD$50,000, which will affect the CAD$500,000 quota of the Small Business Discount (SBD). You can consider investing in the company’s active business, including increasing fixed assets, expanding the company’s operating scale or considering paying dividends to shareholders under appropriate circumstances.