Tax Strategies - Corporate
Following are a few topics for consideration by business owners:
1) $750,000 Capital Gains Exemption
Owners of shares of Canadian Controller Private Corporations ("CCPC") may qualify for a $750,000 capital gain exemption on their disposal. There are a number of conditions that the share owner and company need to meet to qualify. As this exemption is available on an individual basis, if both spouses are shareholders, then the potential exemption can be $1,500,000. One of the key criteria for the company is that it qualifies as an "Active" business for purposes of the small business deduction. Also, all or substantially all of the assets in the company must be attributable to the active business. If not, you must take steps to "purify" or transfer out passive assets, such as extra cash or investments, to ensure qualification.
2) Small Business Deduction
Currently, associated companies must share the small business deduction. This deduction brings the effective combined federal and provincial corporate tax rate down substantially (currently under 16% in Ontario) on the first $500,000 of taxable income. Separate companies may be controlled and operated by your spouse and/or adult children without being associated with the companies controlled by you. This would provide multiple small business deductions within the related group of companies. There are many rules in this area, including de-facto control rules, which must be considered.
3) Individual Pension Plans ("IPP")
The IPP is a pension funding obligation between a company and its employee(s). It can be offered selectively and retroactively. The past service aspect may go back to 1991 and provide a very large tax-deductible deposit. The main benefit of this plan is that it provides for more pension room then a traditional RRSP. The advantages generally include;-lower management fees, eligible for the $2,000 pension credit, allows for years of service prior to setting up of the plan, exceeds the RRSP contribution limits, assets are sheltered from creditors, interest on funds borrowed by the company to fund the IPP is deductible where RRSP borrowings are not. The disadvantages are that admin. costs are higher, the IPP's are locked in until retirement and contributions must be made regularly. Under the right circumstances, IPP's may be a better alternative then RRSP's.
4) Employee non-taxable gifts and awards
An employer can provide up to two non-taxable gifts or awards per employee per year totaling less than $500 each, including taxes, without this being a taxable benefit to the employee. To qualify, the gifts or awards must not be cash or near cash, reimbursements of a gift or award the employee purchased, hospitality awards such as team-building lunches and "thank you for doing a good job" type of awards, points that are redeemable for air travel and other rewards, gifts and awards to shareholders and their relatives, disguised remuneration (ie, given as a bonus). Gifts for special occasions such as Christmas, birth of a child or marriage are generally acceptable. Awards for recognition of special achievements/milestone such as years of service, meeting or exceeding goals or standards would likely qualify.
5) Private Health Services Plan
The CRA does allow companies to set up their own health services plan (vs. through an insurance company). The plan must be made available to all employees. Shareholders should not have special treatment. When all employees are also shareholders, the coverage should be similar to that provided to employees of similar size and type of organizations. The benefits provided should be similar for all employees. The plans can provide for escalating benefits depending on years of service or other objective criteria, provided they are available to all employees under the same criteria. If structured properly, the expenses are deductable by the company and non-taxable to the employees.
6) Estate freeze
An estate freeze is a generic term relating to a series of corporate reorganization transactions that alter the share structure of your company with the purpose of transferring ownership and future growth to other family members and/or non-related parties on a tax deferred basis. There are many estate freeze structures, depending on the needs of the controlling shareholders. In a typical parent(s) to children estate freeze situation, the parent (s) exchange their growth (common) shares for redeemable retractable hi-low special shares with a fixed redemption amount equal to the fair market value of the company. New common shares can now be issued to the parents who can gift them to their children. These common shares now have a nil or nominal value, because the redemption amount of the special shares carry the full value of the company. Future appreciation in the value of the company now attributes to the common shares owned by the children. The parents can continue to maintain voting control. This reorganization can be structured to provide alternate dividend distributions to family members by setting up various classes of special and common shares, depending on the goals of the controlling shareholders.
*This information is provided for educational purposes only and should not be interpreted as a specific treatment plan or course of action and is not a substitute for expert professional accounting and legal advice.
