As an accountant, we wear many hats when dealing with clients. Sometimes we’re accountants, sometimes advisors, sometimes a confidante, and sometimes we’re just another parent of a kid on your child’s soccer team.
Regardless of which hat we’re sporting on a particular day, one of the main functions of our job is to help you save as much on your tax bill as possible.
So a question we always like to ask a client is whether their company, in its current state, is structured to save the most amount of tax. Oftentimes, they think the answer is yes, but in reality it’s not.
For me personally, restructuring is one of my favourite parts of the job because it allows me to take something that already exists and modify it in a way that greatly benefits my clients’ bottom line and family wealth immediately, and going forward.
There are various vehicles we can use in restructuring your business to save taxes.
Restructuring your company by creating holding companies and family trusts as off-shoots of your operating company can create thousands of dollars in annual tax savings.
By restructuring, excess cash can be kept within your corporate structure in order to defer paying personal income tax on income earned in the business. Excess cash is defined as monies earned by your business after paying corporate taxes that is over-and-above what you need to cover your personal and living expenses.
If excess cash or other inactive assets, such as portfolio investments, are kept in the company, its shares may not qualify for the enhanced capital gains exemption on an eventual sale. Simply paying this excess cash to yourself can attract a large personal tax bill. However, creating a holding company, or some other vehicle, where you can keep this excess cash will protect you from that same bill.
Your company can flow excess cash to an investment holding company while still deferring the payment of personal income taxes. This will ensure the company’s shares still qualify for the enhanced capital gains exemption. The investment holding company can also be used to purchase real estate investment properties, and because of the tax savings created, more funds are available for down payments on these properties.
You are also going to want to consider income splitting with your spouse and adult children. When structured properly, and as long as your spouse or adult child have no other source of income, dividends up to $32,500 in 2016 (Ontario) can be paid out to them with a tax bill of only $441.
Depending on your circumstances, family trusts may need to be considered as part of your overall corporate structure as they can be used to further assist in income-splitting and growth sharing among family members, and can help to better protect your assets from the potential breakdown of a child’s marriage. They have become ever more popular given that they are the ultimate tool for overall flexibility in tax and estate planning. Structuring your company to allow future growth of the business to be shared among the family and multiply the use of the enhanced capital gains exemption of up to $824,176 per individual (for 2016) on a sale of the company’s shares is another way to create significant tax savings.
We always want to leave our family as much money as possible upon our deaths, and restructuring your business can help you achieve that goal. Probate fees arise, and can be quite high, when an individual passes away. They are assessed on the value of the individual’s estate. By keeping most of your wealth in the corporate structure, you can have an additional will that would address the value retained in the structure and protect it from probate.
Potential tax savings are not the only reason to consider revamping your corporate structure. It can also limit your business’s liability. Cash held within the corporation is open to that corporation’s creditors, as well as the company’s inherent liability attached to its regular and ongoing operations. Regularly moving the excess cash and inactive assets to an investment holding company can protect your hard-earned money. The investment holding company can always loan back funds to the operating company on a secured basis. As with any tax planning, a corporate reorganization requires careful design and consideration. You should meet with your tax professional to discuss the options available to you. GGFL has experienced professionals who would be happy to discuss your company and its current structure.
