While taking smart steps to minimize tax has always been important, early signs indicate that under the new federal Liberal government, proper planning is going to become even more critical.
This is particularly the case for entrepreneurs who may have complex personal finances, as well as the high incomes that have been the target of many of Justin Trudeau’s campaign messages. While it will be some time before Trudeau’s ideas start to come to fruition in the form of changes to the tax code, there are actions entrepreneurs can take now to maximize their wealth.
Take advantage of income splitting
Many entrepreneurs in Canada have reduced their family’s overall tax burden through income-splitting benefits that were introduced by the Harper government, known as the “Family Tax Cut.” Trudeau has talked at length about his position on the Family Tax Cut and his plans to eliminate it, saying it only benefits a few Canadians.
As it is quite likely this tax-reduction mechanism will soon appear in the crosshairs of the new Liberal government, it may be wise for entrepreneurs who have not yet availed themselves of income-splitting strategies as fully as they can, to do so. Using other tax-planning techniques, income may be transferred to lower-income family members, such as a spouse, to reduce the household’s overall tax burden. Such planning, at least for the moment, does not appear to be a focus of the new government.
Defer personal income using a holding company or incorporating
The Liberals promised a new tax bracket of 33% for individuals earning more than $200,000 per year. This is up from the current top federal bracket of 29%, affecting individuals with taxable income over $138,586.
Tax Rates — Salaries
|Prince Edward Island||51.37%||47.37%||4.00%|
*Potential tax savings if income accelerated into 2015
Entrepreneurs who might normally withdraw more than $200,000 each year as personal income might be wise to consider whether they really need that sum to live on. If their personal expenses can be kept under the $200,000 threshold, they might be wise to defer personally earning income above $200,000. In certain circumstances, this income could be left in a holding company to defer paying personal tax on it, using the provision that corporate dividends can generally be transferred from an operating company to a holding company tax-free.
Entrepreneurs who are not incorporated might want to take a closer look at taking that step, in light of the expected increase in taxes on personal income.
Consider what effect higher personal tax rates will have on finances
If an entrepreneur does require more personal income in the near term – maybe to pay for a new car or home renovation – it may be best for them to take that money out of their company in 2015, rather than in 2016. This means the income will be taxed at the 2015 tax rate for personal income, rather than what may be a higher rate after the new government implements the promised changes.
If there are ways to accelerate income into 2015 (or possibly defer expenses or deductions into 2016), it may be wise to do so, in light of the anticipated higher tax rates at the higher income brackets.
Realize capital gains sooner
As tax rates on capital gains are anticipated to increase in 2016, if you are planning to sell any investments in the short term, you may choose to sell them in 2015, rather than 2016, to benefit from the lower 2015 capital gain tax rates, as outlined in the following table.
Tax Rates — Capital Gains
|Prince Edward Island||25.69%||23.69%||2.00%|
Stock option claims may be capped
One of the Liberals’ election platform planks involved stock options being used as a form of employee compensation. While the party acknowledged the valuable role of stock options, particularly for start-ups, they pledged to cap the amount that can be claimed under stock option deductions. Specific measures have not been announced, but it is expected that employees with up to $100,000 in annual stock option gains would be unaffected by the cap. You may choose to accelerate the exercise of stock options in 2015, which may mitigate the effect of the new proposed cap.
Document your actions, and seek professional advice
The Liberals have said they expect some taxpayers will use tax-planning strategies to minimize their tax exposure. Accordingly, they have promised to increase enforcement resources for the Canada Revenue Agency to ensure tax liabilities are collected.
Entrepreneurs should take extra care to document carefully any tax-planning strategies implemented. It is also extremely important to consult skilled and experienced professional tax advisors, who will point out alternatives to pursue, as well as how to mitigate potential issues. A good tax advisor will remain in tune with the signals and news bulletins provided by a range of sources and the expected changes in the tax legislation.
This allows entrepreneurs to focus on creating opportunities to enhance and grow their business and minimizes being sidetracked with a time-consuming challenge from the tax authorities.
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.