Small Business Tax Planning

Transcription

1 Small Business Tax Planning Ellis Orlan, CPA (IL), CGMA Andy Yap, CPA, CA

2 Introduction by Ellis Orlan Topics for Discussion Andy Yap 1. Why incorporate? 2. Tax planning with an incorporated business 3. Carrying on business in the United States 4. Other Matters 2

3 Small Business Tax Planning Tax Planning Objectives for Business Owners To identify opportunities to reduce, defer or eliminate taxes To protect assets and minimize liability exposure To take advantage of government incentive programs To create financial flexibility To develop ownership structures that will align with business interests To facilitate long-term tax, estate and succession plans 3

4 Canadian tax system considers full integration so to avoid double taxation. Tax rates in 2014/2015 for an individual and a Canadiancontrolled private corporation in Ontario are: Personal high tax rates for ordinary (business) income $136,270 to $150, % $150,000 to $220, % Over $220, % Corporation rates for active business income $1 to $500, %* Over $500, %** *When integrated with dividends distributed from after-tax profits, the combined personal and corporate tax rate is 49.41% (tax savings of 0.12% and tax deferral of 34.03%) **When integrated with dividends distributed from after-tax profits, the combined personal and corporate tax rate is 51.36% (tax cost of 1.83% and tax deferral of 23.03%) 4

5 Who can incorporate a business? Any business and most regulated professions (accountants, lawyers, engineers, medical professionals, etc.) Real estate sales agents were added in 2014 Professional corporations are used for income tax purposes but not for minimizing professional liability Careful not to fall into the trap of a Personal Services Business or otherwise referred to as an incorporated employee 5

6 Small Business Tax Planning Personal Services Business Income Considered as an incorporated employee when an individual renders services (reasonably regarded as an officer or an employee) using a corporation which he or she is a related person or a specified shareholder of the corporation Small business (deduction) rate at 15.5% does not apply Limited expense deductions (similar to what s available to an employee) Exception: if corporation has more than 5 FT employees throughout the year that engages in the business earning income that is considered as personal services business 6

7 Small Business Tax Planning Planning Certain plans may not be viable if the individual is a U.S. person 1. Deferral additional small business deduction if spouse/partner owns a separate corporation that is not associated 2. Minimize creditor and liability exposure 3. Income sharing with family members and capital gain exemption planning 4. Facilitate financing 5. Retirement and estate planning 6. Others 7

8 1. Use of Separate Management Company owned by spouse/partner Management Company has its own Small Business Deduction 8

9 2. Holding company to receive inter-co. dividends and protect retained earnings minimize creditor exposure Inter-co. dividends between connected corporation; recipient corporation doesn t pay Part IV tax unless distributing company received dividend refund 9

10 3. Income Sharing and Capital Gains Exemption Planning Consider using a discretionary family trust if there are multiple family members (children adult and/or minors) 10

11 4. Facilitate financing and minimize creditor exposure Separate company to own real estate used in the business both companies share one small business deduction 11

12 5. Retirement and Estate Planning Wealth accumulated during the life of the business and proceeds from the sale of the business can be used to fund retirement. Use of life insurance should be considered in the early stages of the planning 12

13 Carrying on Business in the United States Recommend to seek advice of specialists with the knowledge of U.S. and cross-border taxation Very complex rules that requires the knowledge of: U.S. federal domestic taxation (Internal Revenue Services - IRS Codes); Canadian income taxation Canada U.S. Income Tax Convention ( Tax Treaty ); and Various state and local income and sales tax As a self-employed individual or a corporation, carrying on business in the U.S. can takes on many different meanings. References often made to provisions addressing permanent establishment in Tax Treaty 13

14 Carrying on Business in the United States Added to the Tax Treaty definition of permanent establishment in 2009 include service permanent establishment provisions in Article V (9) which captures those providing services across the border where: Article V(9)(a) requires services to be performed by an individual present in the U.S. for an aggregate of 183 days or more in any 12- month period, and 50% of the gross active business revenues during that period are derived from that individual in the U.S. Article V(9)(b) requires services to be provided in the U.S. for an aggregate of 183 days or more in any 12-month period with respect to the same or connected projects for customers who are resident in U.S. or have a permanent establishment in the U.S. 14

15 Carrying on Business in the United States Possible US tax exposures include: US and state income tax liability and filing obligations Double taxation and maybe relief by way of a foreign tax credit and possibly exemptions under the Canada US Treaty US and State payroll tax obligations US federal and state tax Identification Number registrations US tax withholding at 30% and possible State tax withholding on US source payments made to non-us recipients possible relief under Canada US Treaty (State may not accept Tax Treaty) State sales tax liability and filing obligations 15

16 Carrying on Business in the United States Important Points to Remember: Tax Treaty may provide relief against double-taxation at the U.S. federal level Generally state and local governments income and sales tax regimes do not recognize the Tax Treaty If income tax relief is provided by Tax Treaty, it is highly recommended to file a U.S. tax return and claim treaty benefits 16

17 Small Business Tax Planning Government Incentives (examples) 1) Ontario Co-operative Education Tax Credit Available if employer hires students enrolled in a co-operative education program at an Ontario university or college 2) Ontario Apprenticeship Training Tax Credit Available if employer hires and trains apprentices in certain skilled trades 17

18 Small Business Tax Planning Government Incentives (examples) 3) Ontario Interactive Digital Media Tax Credit ( OIDMTC ) May be available if website provides interactive digital media in which primary purpose is to educate, inform or entertain, and that achieves its primary purpose by presenting information in at least two of: a) Text b) Sound c) Images 18

19 Government Incentives 4) Scientific Research and Experimental Development Tax Credit ( SR&ED ) A systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is a) Basic research: work undertaken for the advancement of scientific knowledge without a specific practical application in view, b) Applied research: work undertaken for the advancement of scientific knowledge with a specific practical application in view, or c) Experimental development: work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto 19

20 Government Incentives 4) Scientific Research and Experimental Development Tax Credit ( SR&ED ) c) Experimental development: work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto A Canadian-controlled private corporation, on meeting certain requirements can obtain a refundable Federal SRED credit of 35% plus provincial credit (combined at approx. 40% to 41%) on qualified SRED current expenditures of up to $3M. 20

21 Indirect Taxes Small Business Tax Planning Goods and Services Tax/Harmonized Sales Tax Workplace Safety Insurance Board coverage 21

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23 CONTACT Ellis Orlan, CPA (IL), CGMA (416) Andy Yap, CPA, CA (416)

24 Disclaimer Small Business Tax Planning This document is intended to provide general information and for discussion purposes only. Accordingly, the information in this document is not intended to constitute accounting, tax, legal, investment, consulting or other professional advice or services. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional advisor. Diagrams are intended to illustrate a concept. Actual structures implemented may be different from these illustrations after taking into consideration specific facts and circumstances. 24