Tax tips for the self-employed
Being self-employed means you have access to a whole raft of tax-planning strategies not available to the general population. Here's a look at some of the most important ones.
Consider the optimum salary/dividend mix
In some cases, you may want to pay enough salary to reduce the corporation's income to the level at which it will qualify for the Small Business Deduction. Many factors affect decisions regarding the optimal salary/dividend mix, including cash flow needs, personal and corporate income levels, the corporation's tax status, and your Registered Retirement Savings Plan (RRSP) contributions.
If your business has a year-end after July 6, it can declare a bonus to you at year-end, but pay it after December 31. The corporation can then claim a deduction in its current fiscal year, and you can defer personal tax on the bonus until the subsequent calendar year. Note that the tax on the bonus must be remitted to the tax department within six months of the company's fiscal year-end.
Deduct health insurance premiums
Self-employed individuals and unincorporated business owners may deduct premiums for supplementary health coverage, subject to certain restrictions.
Pay the taxes on time
If you are self-employed, your tax return does not have to be filed until June 15, but any taxes owing will be due by April 30.
Pay salaries to family members
Family businesses provide special opportunities to split income with family members. Your business can pay a salary or wages to your spouse and children as long as the payment is reasonable for the work performed.
Examine capital gains exemptions for family members
There may be opportunities to multiply use of the $800,000 capital gains exemption (see below). Each family member who is a shareholder may be able to take advantage of the capital gains exemption.
Abide by the family trust rules
When a minor child receives income from a trust or partnership with a business carried on or participated in by a relative, it will be taxed at the top marginal rate, regardless of the child's tax bracket. Dividends and other shareholders' benefits on unlisted shares of Canadian companies will also be taxed at the top rate.
Use your special capital gains exemption
A special $800,000 capital gains exemption is available on the sale of "qualified small business corporation shares." Make sure your corporation meets that definition on an ongoing basis. This will also preserve your ability to claim allowable business losses with respect to a loss on the corporation's shares.
Consider an estate freeze
An estate freeze can be used to transfer the future growth of a business, or other assets, to your children and defer tax for decades.
Effective personal and business tax planning can be a complex matter; be sure to take advantage of professional advice.
Contact your BlueShore Financial financial advisor today – we can provide you with the information and resources you need to ensure you take best advantage of the tax benefits available to you.