Small Business Owners

The following opportunities are available:

• Professionals are now entitled to incorporate to take advantage of low corporate tax rates on retained income.  Incorporation also makes particular sense where the owner expects to sell now or in the near future, since the shares may qualify for the $500,000 enhanced capital gains exemption for small business. In addition, professionals who have previously had tax deductions from tax shelter investments will want to incorporate, in order to take income in the form of dividends.  This will help eliminate their cumulative net investment loss account which could otherwise block access to the $500,000 exemption.

• Consideration should be given to setting up an Individual Pension Plan (“IPP”).  This would allow for greater contribution than available in an RRSP.  This makes most sense where a one-time large past service contribution  can be made, since the costs of setting-up and administering these plans often makes them somewhat impractical.

• Small business owners who have previously crystallized the $500,000 small business capital gains exemption may be able extract monies from their company without taxation, with some restructuring.  This could result in an ultimate tax saving of about $75,000.

• Small business owners, who expect to leave Canada permanently at some point in the future, should consider the use of a retirement compensation arrangement (“RCA”).  This vehicle could allow for an ultimate reduction in tax rates on salary from 46.41% down to 25%.

• Small business owners should be protecting assets through creditor proofing, now while business is good.  This includes separating business from investment assets such as real estate, removing large equity balances from operating business by using holding companies, and securing existing shareholder loans.  Special assets such as operating equipment or valuable licenses should also be protected. It is often very difficult if not impossible to protect assets once creditor issues arise.

• Small business owners who expect to sell their shares in the future should take steps now to allow for the multiplication of $500,000 small business capital gains exemption on the ultimate share sale.  A tax saving of approximately $115,000 can be realized for every person who can take advantage of the exemption.  This could include one’s spouse, children of any age, and other related persons.

• Small business owners with more than one operating entity should attempt to “disassociate” the entities so that each entity is entitled to a separate low tax rate.  This could save about $54,000 per annum.