Vern Krishna of TaxChambers LLP discusses tax planning for business at year-end in a featured article for Canadian Current Tax.
Canadian-controlled private corporations (CCPCs) that carry on an active business in Canada are taxable a special low rates, in 2017, the first $5000,00 of income from such active business income (ABI) is taxable at a combined federal and provincial rate of about 15%. Income above $500,00 is taxable at about 27.5 per cent. Hence, it is important to plan for shareholder and corporate taxation before the year end to maximize rates of return, and minimize the overall tax burden.
Taxpayers who employ their spouse or adult children in their CCPC should pay them salaries if they have a low marginal tax rate. This form of income shifting can reduce the total tax burden on the family, and put money into the hands of children to pay for their education and other expenses. Paying family members a salary also allows them to build up their retirement income through Registered Retirement Savings Plans (RRSPs).
There are, however, several traps to watch for. Any salary must be reasonable and commensurate with the nature of the work that the spouse or children perform. As a general rule, one can pay a salary that is approximately equivalent (or even slightly higher than market rates). Since the payment would be within the family, it is advisable to keep meticulous records as the CRA will want cogent evidence for the deductions.
Download >> Canadian Current Tax, VOLUME 28, NUMBER 4 - JANUARY 2018
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.