An integrated tax strategy is essential for small businesses, but too few have one, say financial advisers.
Structuring investments
Bonds and term deposits are an attractive investment for risk-averse small businesses, but they might not provide the best after-tax alternative.
Deferring income
In Canada, taxes on business income can be deferred when earned through a company, but when those funds are transferred to shareholders via dividends, the overall tax paid is approximately the same. By taking a dividend instead of a salary, small-business owners can avoid having to pay Canada Pension Plan (CPP) contributions. The strategy offers immediate cash savings, but Lee pointed out that it’s a trade-off because while small-business owners won’t have to pay into CPP, they also won’t have access to its benefits.
Charitable remainder trusts
Typically used to minimize current tax liabilities, charitable remainder trusts can act as a donation and an investment.
Holding companies
Holding companies, which own other operating companies but don’t produce goods or services, provide tax-deferral options. Small-business owners can defer tax on income earned until it is withdrawn from the holding company via dividends. Holding companies also offer non-tax-related benefits. Keeping excess earnings in a holding company can safeguard equity from creditors and bankruptcy.