Re-structuring your company for savings & protection
Canadian business owners work hard for their money – so naturally they want to keep as much of it as possible.
If you believe you are paying too much tax, worry about creditors attacking your assets or don’t have a current financial strategy for your business, then it may be worthwhile to explore a simple corporate re-organization.
It’s not as scary as it sounds.
“A corporate re-organization involves tweaking the ownership of the company; for example, you could create a holding company or a family trust,” explains Howard Lerner, a Chartered Accountant and Partner with the firm SBLR LLP.
His Toronto-based accounting firm specializes in tax planning, corporate structuring and financial strategies for entrepreneurs.
Mr. Lerner says corporate re-structuring can benefit small business owners in different ways, including the ability to:
1. Improve your remuneration strategy. ”Often, receiving dividends from your company rather than salary can substantially lower personal income tax,” claims Mr. Lerner.
2. Income splitting with other family members. Corporate re-structuring may give you more options to distribute income to family members, believes Mr. Lerner. “For example, paying your children in the form of a salary when they aren’t involved in the day-to-day operation of the business will likely be challenged by the CRA,” cautions Mr. Lerner.
“However, there are no such restrictions on dividend income – providing the individual is a shareholder,” he adds.
3. Maximize the Capital Gains Exemption. Shareholders of Canadian controlled private corporations engaging in active income could be eligible for a Capital Gains Exemption up to $750,000 for each individual shareholder, says Mr. Lerner.
4. Creditor-proof retained earnings. In the event of a successful lawsuit or claim against your business, the net assets held in your operating company could be distributed to unsecured creditors – leaving nothing left for you.
“That cash nest egg you’ve built up in the company could disappear in times of trouble,” warns Mr. Lerner. “However, if handled correctly, the retained earnings can be creditor protected from any general creditors, with the shareholders set up as secured creditors.”
Is it expensive to re-structure your company? It all depends on how you look at it. “A good accountant will likely save you a lot more in tax dollars than they charge in fees,” claims Mr. Lerner.
“Hire an accountant who doesn’t punch the clock, who is willing to meet with you throughout the year to supply business advice,” he suggests. “Hire one who is willing to sit down with you and find the tax nuggets that others may have overlooked.”
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This article is presented for information purposes only. For advice specific to your business, speak with a qualified tax specialist.
Has your business been re-structured to enjoy any of these benefits? Which strategies are working well for your company? Please share your comments below.
By Roger Pierce