Incorporation for Professionals

Spring 2011

Introduction

“I have something my tax doctor calls ‘narcotaxis.’ Within 20 seconds of hearing someone launch into an explanation of tax laws, my eyes become glassy, my body loses all feeling and I go into a shallow coma.”

Russell Baker, columnist and journalist

Why incorporate?

Tax deferral Income-splitting Limited liability (generally applicable to

business owners, but not to professionals)

Tax Deferral

13.5% corporate tax rate on active business income up to $500,000

26.5% corporate tax rate on active business over $500,000

Tax Deferral

Taxable

Income

Personal

Tax Rate

Corporate

Tax Rate Difference

$0 $36,146 20.06% 13.50% 6.56%

$36,147 $41,544 22.70% 13.50% 9.20%

$41,545 $72,293 29.70% 13.50% 16.20%

$72,294 $83,001 32.50% 13.50% 19.00%

Tax Deferral

Taxable

Income

Personal

Tax Rate

Corporate

Tax Rate Difference

$83,001 $83,088 34.29% 13.50% 20.79%

$83,089 $100,787 38.29% 13.50% 24.79%

$100,788 $128,800 40.70% 13.50% 27.20%

$128,800 and up 43.70% 13.50% 30.20%

Tax Deferral

At the highest marginal personal tax rate, the deferral, advantage is over 30%

That means within the corporation, you have $0.30 more on every after-tax dollar to invest

Huge opportunity to accelerate wealth accumulation

View the company as an enhancement or substitute for RRSP investing

Taxation of CorporateInvestment Income

Investment

Income

Corporate

Tax Rate

Refundable

Tax

“Net” Tax Rate

Interest 44.67% 26.67% 18%

Rent 44.67% 26.67% 18%

Dividends 33.33% 33.33% 0%

Capital gains

22.33% 13.33% 9%

Investment Asset Allocation

Interest income in RRSP Dividends and capital gains in company

- the tax preferred status of dividends and capital gains is lost in the RRSP

Income-Splitting

Spouses, including common-law and same-sex couples

Children- adult children (18 and over), OK- minor children, not OK (“kiddie-tax”)

Consider Trust, rather than direct share ownership

Limited Liability

Not applicable to liability arising from the provision of most professional services

But does apply to other forms of liability Consider Holdco for investments to

enhance creditor-protection, particularly with Trust as Holdco shareholder

Compensation Planning

Salary vs. dividends CPP considerations RRSP consideration Income-splitting opportunities

Salary

Deductible to company CPP applies

- 9.9% combined rate, up to YMPE- $4,435 annual contribution- 87% increase since 2000- future increases?

Generates RRSP contribution room Restrictions on income-splitting Payroll registration, monthly remittances

Dividends

Not deductible to company

- paid out of after-tax income No CPP obligations No RRSP contribution room Flexible income-splitting, no restrictions No payroll registration required

Tax Planning

“I’m proud to pay taxes…; the only thing is, I could be just as proud for half the money.”

Arthur Godfrey

Tax evasion is illegal, tax avoidance is your right!

Employees Profit Sharing Plan

EPSP contributions deductible to company NO CPP obligations Generates RRSP contribution room Income-splitting may be restricted, subject

to GAAR Tax deferral

Private Health Services Plan

Deductible to company, subject to reasonableness tests

No taxable benefit to employee Direct reimbursement vs. “trusteed” third

party plan

Tax Planning

Life insurance Critical illness insurance Disability insurance Club fees and dues Death benefit

Tax Planning

Transfer of non-registered investments

- create tax-free shareholder’s loan balance

- rollover vs. taxable transfer, capital gains tax rates vs. dividend tax rates

- utilize capital loss carry-forwards

Tax Planning

Understand that there’s generally always a tax cost to withdrawing funds from the company (i.e., lost tax deferral)

Consider minimizing personal mortgage payments

Consider leasing vs. buying automobile

CRAs Top 10 Audit List

1. Verification of capital gains and losses 2. Allowable business investment losses

(ABILs) 3. Carrying charges 4. Foreign tax credits 5. Province of residence

CRAs Top 10 Audit List

6. Large charitable donations or donations

of property 7. Employment expenses 8. Child care expenses 9. Mining and oil and gas investment

income reporting 10. Tuition/education expenses

David Letterman’s Top 10 (Dumb) Tax Tips (Canadian version)

10. Send tax return to NRA instead of CRA, since NRA never pays taxes

9. Answer every question with, “Wouldn’t you like to know?”

8. Hide all money in mattress; on return write “No money hidden in mattress”

7. If you’ve just eaten, don’t do taxes for at least half an hour

6. Hire yourself as an employee, fire yourself, sue yourself for discrimination, deduct court costs

David Letterman’s Top 10 (Dumb) Tax Tips (Canadian version)

5. Report $1 billion income so CRA will think you’re some sort of big shot

4. For charitable donations, list $9 you spent on last Kevin Costner movie

3. Fill out Simplified Return because it has only two lines.

2. Find out those two lines are: 1) “How much money did you make?” and 2) “Send it to us.”

1. List your imaginary friend as a dependant

Final Comments

“Remember, today is the tomorrow that you worried about yesterday”

Dale Carnegie

Don’t procrastinate!

Questions?

Contact Information

John Groenewold, CGA, CFP, TEP Groenewold + Associates

410 – 1508 West BroadwayVancouver, BC V6J 1W8(604) 683-3488 (phone)(888) 349-8834 (fax)jgroenewold@wealth-solutions.ca

Legal Disclaimer

This presentation is not intended to provide legal, accounting, tax or specific investment advice. If such advice is required, the services of a competent professional should be sought. The information contained in this presentation was obtained or compiled from sources believed to be reliable. However, Groenewold + Associates cannot represent that the information presented is accurate or complete. Groenewold + Associates disclaims any responsibility or liability for any reliance placed on the content of this presentation.