Your Kelowna accountant should be aware of some of the easy tax tips and savings available to individuals and business owners. Below, we briefly discuss those tax tips.
Tip #1 – Payment of Dividends vs. Salary
Did you know dividends are taxed differently than wages or salaries? Generally, the taxes payable on receipt of dividends are generally lower than the receipt of wages or salaries. For example, and assuming you have no other sources of income, dividends of up to $41,000 would not result in any federal income tax. On the other hand, $41,000 in the form of wages or salaries would result in federal income taxes of $4,400 approximately. As you can see, tax savings would be achieved when dividends are received.
Tip #2 – Minimize Taxes by Incorporation
Corporate tax rates are much lower than personal tax rates. In BC the 2012 combined federal and provincial tax rates is 13.5% (on active business income up to $500,000) if you are a Canadian Controlled Private Corporation (CCPC). Individuals on the other hand are taxed at gradual rates with the maximum rate of 43.7% in BC. This produces tax savings of 30% through incorporation. While at first glance it might seem that incorporation should be a no brainer, incorporation is not for everyone. There a many administrative costs for maintaining a corporation, such as the legal and accounting fees, including the ongoing compliance requirements each year. As a rule of thumb in our office, taxable income should generally be over $60,000 before it makes economic sense to incorporate.
If you are already incorporated, then tax planning would be essential to determine whether you should receive a payment of dividends and/or salary, and whether other income splitting opportunities are available. If you can retain as much of the profits inside your corporation, then you receive the benefit of significant tax deferral.
Tip #3 – Payment of Salaries to Spouse or Family Members
Business owners should consider paying salaries to their spouse or family members. An important factor that needs to be considered is that the amount paid must be reasonable, and it must be related to work/duties in respect of the business. To prevent the Canada Revenue Agency (CRA) from challenging the amounts paid, adequate documentation should exist. Some of these documents may include an employment contract (setting out job responsibilities), & work schedule evidencing days worked.
Tip #4 – Tax Free Automobile Allowance
Do you use your own personal vehicle for work purposes? If you answered yes, than you should know there is a deduction available by your corporation. A corporation can deduct automobile allowances paid to an employee at a rate of 52 cents per KM for the first 5000 of employment-related KM’s. The rate decreases to 46 cents thereafter. The allowance that the employee receives is not taxable and the amount paid by the corporation is deductible.
Tip #5 – Home Office Expenses
Small business owners (self-employed or incorporated) may sometimes need to work from out of their home and maintain a home-office (such as the garage, basement, den etc). Expenses incurred that are for employment purposes are deductible. But be careful, you won’t get to deduct everything 100%. The amount that can be deducted is based on the proportion of the rooms or space utilized in comparison to the entire home. Some common expenses include;
– Mortgage interest on your residence (principal payments not deductible)
– Repairs and Maintenance
– Property Taxes
– Home Insurance
As an example, if your home office space is approximately 15% of the total square footage of your home, then you would be able to deduct 15% of the total expenses, such as electricity, heat, & property taxes etc.
While I could go on with more tax tips, the ones discussed above are more obvious than others, and fairly easy to implement. If you are not already applying these easy tax tips with your Kelowna accountant, you are paying more taxes than you really need to.
This blog posted on Dome Duong Chartered Accountant provides information of a general nature and should not be considered specific advice, as each reader’s personal financial situation is unique and fact specific. There are many pitfalls to the strategies discussed above and professional tax advice with your Kelowna accountant is essential.