Effective Strategies to Minimize Tax

Estimated reading time: 2 minutes and 59 seconds

Controversial discussions are arising in the wake of Ottawa’s recent proposed tax changes. While nothing has been officially confirmed, business owners could be facing significant tax increases. Should the proposed changes go through, it might affect their ability to save for retirement.

However, as the 75-day consultation period dwindles, business owners should be prepared for a potential new tax reality. Below, we’ll highlight a few strategies that can help business owners cope with these impending tax increases. One of them is something our team at BenefitDeck is uniquely familiar with— investing in business life insurance. Before we dive into that, let’s summarize the proposed tax changes:

Quick Summary of the Proposed Tax Changes

1. Income sprinkling – Business owners may no longer be able to give salaries, wages or dividends to zero or low-income family members to draw out business income at lower tax rates. With these new policies, family members would have to be active participants in the business and above the age of 25.

2. Lifetime capital gains exemptions – Family members may no longer be able to shelter capital gains on qualifying corporate shares.

3. Corporate income retention – Keeping funds in the corporation to defer taxes to later years may no longer be advantageous. Sheltering income in the corporation may result in higher taxes down the road.

4. Passive income – Any corporate income that is invested outside the ‘core business’ will be subject to onerous tax rates which could lead to neutral or worse-off outcomes.

5. Conversion to capital gain income – Businesses may no longer be able to use advantage tax strategies to convert corporate income into capital gains to reduce taxes.

To dive deeper into these proposed changes, here are a few other sources of information:

- The Canada Revenue Agency

- The Globe and Mail

- The Financial Post

Using Business Life Insurance to Shelter Income from Taxes

If the proposed changes go through, 2018 could become a costly year in terms of taxes for many business owners. One strategy that could help alleviate the tax hike for business owners could be in the form of corporate life insurance as it may prove to be an effective way to reduce taxes in the long-term. Read more about How Business Life Insurance Keeps You Profitable

Another 3 Strategies to Consider

1. If owners have a Capital Dividend Account, they might want to sell or crystalize their gains before the end of 2017. That’s because the effective tax rate will likely be much less in 2017 versus 2018.

2. If owners have zero or low-income family members who are shareholders, they might want to consider dispersing a lot of dividends to them this year. If they have no income, an owner can save a significant amount of taxes by sprinkling up to $200,000 each, instead of withdrawing funds personally and paying the marginal tax rate on that value in 2018.

3. Again, if owners have family members who are shareholders, they might want to crystalize each of their lifetime capital gains exemptions. An accountant might be able to trigger gains in a few ways up to a value of $835,714 per shareholder in 2017. If four family members are shareholders, that means potentially avoiding tax on up to $2.5 million of capital gains.

Bracing for The Potential Tax Changes

With these proposed tax changes looming, it is important for business owners to consider all their options. While we’ve presented a few strategies here, it’s important that each owner consult their advisors and accountants to see what solutions might be best for their family and company. Regarding all matters concerning business life insurance, our team is happy to help answer any questions.

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