Professional Corporations. Presented by Raza Husain, CA

Transcription

1 Professional Corporations Presented by Raza Husain, CA

2 Should I Incorporate? Questions: Does the professional practice generate more net income than is needed to meet the lifestyle expenses of the professional? If yes, tax deferral equal to the difference between the marginal tax rate of the professional and the tax rate on small business income (15.5% in Ontario). Are there opportunities for income splitting with family members? Is there an opportunity to sell the shares of the corp. at retirement? Are there creditor protection concerns other than professional liability? Does the business structure allow for full access to the small business deduction?

3 Professional Corporate Structures Lawyer A Lawyer B Lawyer C 100% voting 100% voting 100% voting A Prof. Corp. Share of Partnership Profits 33.3% of partnership interest B Prof. Corp. Share of Partnership Profits 33.3% of partnership interest Professional Partnership 33.3% of partnership interest C Prof. Corp. Share of Partnership Profits Professional Business Annual small business deduction of $500,000 must be shared by all three professional corps. 3

4 Removing Money From a Professional Corporation: Salary vs. Dividend Salaries are paid from before tax dollars whereas dividends are paid from after tax dollars Dividend tax credit mechanism allows dividends to have a lower tax cost than salaries Dividends reduce CNIL balance Salary allows for CPP, RRSP and IPP contributions 4

5 Cash Retention Using PC Sole Practitioner Corporation Personal Income $ 130,000 - Personal Tax ($ 44,344) - Corporate Income - $130,000 Corporate Tax - ($ 20,150) $ 85,656 $109,850 Dividends - Practitioner $ 109,850 Personal Tax ($ 16,963) $ 92,887 Extra cash retained by use of PC $7,231

6 Income Splitting Opportunities Personal Taxes Sole Practitioner Corporation Practitioner $ 44,344 $ 16,963 Net After-Tax Income Total Income $ 130,000 Less: Corporation Tax 0 Less: Personal Tax ($ 44,344) Net After Tax income $ 85,656 $ 130,000 ($ 20,150) ($ 16,963) $ 92,887

7 Less Tax = More to Invest 15.5% vs % Corporate Personal

8 Full Income Income $250,000 Less Salary - Net Corporation Income - Corporation Tax (15.5%) - Net After Tax Corporation Income - Net Cash Available in Corporation - Personal Income $250,000 Tax ($100,200) Net After Tax $149,800 Less: Personal Expenses ($100,000) Net Cash Available Personally $49,800 Part Income $250,000 ($160,000) $90,000 ($13,950) $76,050 $76,050 $160,000 $59,000 $101,000 ($100,000) $1,000

9 Ontario Corporate 2011 Tax Rates Passive Income Federal Tax 28.00% Add: Refundable Tax 6.67% 34.67% Provincial Tax 13.00% Total Tax 47.67% Note: However, the refund occurs when taxable dividends are paid.

10 Are you taking FULL Advantage of Your Corporation? It s time to understand how. Presented by Semra Albayrak, CLU Financial Advisor

11 How I work with my clients Meeting # Financial Professionals Involved Action Taken Meeting 1 Financial Planner Gather Background Info (Fact Finding) Brief Discussion of Goals & Challenges Meeting 2 Financial Planner View First Draft of the Full Financial Plan What if Scenarios & Goal Readjustment Meeting 3 Financial Planner Review Final Plan (Receive Written Plan) Begin Discussion of Recommendations Meeting 4 Financial Planner & Risk Management Specialist Review & Implement Risk Management & Estate Planning Recommendations in Plan Meeting 5 Financial Planner & Review & Implement Tax Efficient Retirement Planning Recommendations in Plan Meeting 6 Meeting 7 Meeting 8 Financial Planner & Securities Specialist Financial Planner & Accountant Financial Planner & Lawyer Comprehensive Computer Investment Analysis Asset Allocation Plan & Recommendations Review Tax Minimizing Strategies & Corporate Planning Update Wills & Powers of Attorney Establish Trusts as Necessary Ongoing Financial Planner Ongoing Monitoring / Semi Annual Review

12 Different Entities for Tax Purposes Your Corporation You 15.50% Tax 46.41% Tax $1000 expense. needs $1184 $1000 expense. needs $1867 Given the opportunity, which entity should pay the expense?

13 4D s of Tax Planning DEDUCT DEFER DIVIDENDS DON T PAY

14 Deduct and Defer Earned Income (Passive) 46.4% Tax Corporate Class 99% Tax Sheltered Your Corporation 15.50% Tax Defer 31% Investments Life Insurance 100% Tax Sheltered Lifestyle: You 46.41% Tax - Investments Corp - Life Insurance Paid - Disability Ins - Critical Illness Ins - Health and Dental Ins Pay Tax-Preferred Dividends for Retirement Tax Deduct?

15 Don t Pay Your Corporation You Life Insurance Your Estate CDA Tax Free Capital Dividend

16 Corporate vs. Personal? Earns $150,000 per year and has $25,000 per in pre-tax corporate earnings to invest. What do we do? Pay $25,000 as salary and invest it Corporate Investment $25,000 - $11,602 tax $13,397 to invest 15 years 6% $330,000 ACB=$200,000 A 42% Increase!! $25,000 - $3875 Corporate tax $21,125 to invest 15 years 6% $521,000 ACB=$316, year payout 6% $21,970 annual after tax income 25 year payout 6% $31,299 annual after tax income 16

17 A Professional Corporation Let s take a look at a 38 year old lawyer. He or she earns $500,000 per year and is professionally incorporated. Saves $100,000 per year into the corporation and earns 6.5% in a corporate class investment. Death is assumed at age 88. Under the traditional savings method, the shares are taxed in the hands of the deceased and the assets distributed from the corporation and the net result is dividends of $8,000,000 to the beneficiaries, resulting in approximately $2,400,000 in tax. In the second scenario, the stop loss rules prevent the use of 50% of the CDA credit, resulting in capital gains tax on $4,000,000 of Capital gains, resulting in $928,000 of tax. Net tax saved: $1,471,000

18 Corporate Savings A Different Approach $100,000 / year 20 Years $2,400,000 2 M e 4 M s Retirement t in Tax? 4 Million 30 Years 120k / yr income 8 Million R e a l a t e 4 Million 31% dividend tax $2,400,000 $50,000 / Year 20 Years OR 1 M $928,000? 2 M e 2 M Retirement 2 Million 30 Years 60k / yr income R e a l s t a t e 4 Million 8 Million $50,000 / Year IRP Retirement 30 Years 8 Million $8,000,000 Tax Free Dividend 60k / yr income 6 M 2 M 8 Million CDA Credit

19 Thank you for coming out to Business Basics in Changing Times Conference Some Final thoughts. Clearly define your long term goals Take the time to make sure you know your risks Seek out those who can help you identify and solve these issues Don t just buy products. Implement strategies that will facilitate your goals! Thank you for your time this morning 19 19