Countless businesses have used IDM to help reduce their corporate tax burden. Here are a few ways how we do it.
There are plenty of ways to save on taxes for your business. Canadian businesses can take two approaches to minimize how much income tax they pay – through qualifying for tax credits by taking prescribed actions or simply by claiming available deductions.
Dividends instead of salary
Dividends are payments from a corporation to its shareholders, and they’re considered investment income instead of personal income. Consequently, dividends have a much lower rate of income tax than salary since they fall under the corporate tax rate.
Dividends come with the added benefit of being tax-free for the first $40,000. You can simply take cash out of your company and call it a dividend without worrying about any taxes or penalties.
Dividends are additionally not subject to Canadian Pension Plan premiums. CPP premiums would be 9.9% of the total amount you take out, with a maximum limit of $4,000. Therefore, by not paying into the Canadian system, you could save money overall.
Taking a salary has some advantages over taking dividends, though. First, salaries qualify for earned income purposes when it comes to taxes, which means that the higher your salary is, the more room you have for increases in your Registered Retirement Savings Plan (RRSP). Taking a salary also entitles you to more payments from the Canada Pension Plan (CPP) upon retirement. If saving money is important to you and you want to contribute regularly to your RRSP or receive Canadian pension payments after retiring, then going with a salary makes sense.
Deduction for interest
Many people don’t realize this, but if you pay interest on money that you’ve borrowed to invest in your business, that interest is tax-deductible. So, for example, if you take out a bank loan or put business expenses on a credit card and rack up some debt with accompanying interest payments, one good way to lower your taxes is to charge that interest expense back to your corporation. That way, the corporation can deduct it as an expense when they file their taxes.
The interest you receive from the corporation would cancel out the interest you have to pay to a third-party bank or credit card company, resulting in zero income tax except for your personal taxes.
A shareholder loan
A shareholder loan allows the company and its owner to take advantage of cash flow timing between them through dividends, salary, or other means.
Shareholder loans are financing provided to a company by its shareholders and represent debt for the business. A shareholder loan could be expenses that you have paid on your corporation’s behalf and therefore your corporation now owes you. It could also be money that you’ve lent your corporation for startup expenses or operating expenses. As said, shareholder loans can be paid on a completely tax-free basis.
Therefore, if you have a $25,000 shareholder loan outstanding from your corporation, it would make more sense to pay yourself back that amount before taking any income via salary or dividends (both of which are taxable).
IDM excels at helping businesses reduce their corporate tax burden. Contact us for a free consultation to see how we can help yours.
