As the tax advisor for successful businesses in Vancouver, I have my share of owners who spend money as fast as they make it. For these spendthrifts, tax planning essentially boils down to cash management. And I have another group of successful business owners who are obsessed with paying little tax as possible come April 30.
As I explain to the second group often, tax planning is much more than just minimizing taxes for this year. Tax planning is about letting you live the life you dreamt over a long period given your
current success and what the future looks like from you stand now.
Corporate Tax Planning
For Canadian small businesses, there are only two corporate tax rates. For corporate profits under $ 500,000 there is what I call the little rate, which is 11% for BC currently. And for corporate profits above $ 500,000, there is the big rate, which is 27% for BC currently. For individual taxes, there are many brackets ranging from 15% and maxing out at 53.50% for regular income
Given these tax brackets, it is tempting for a shareholder of a CCPC to draw out as little as possible to stay in the low tax bracket at the personal level as the corporate tax rate of 11% is a
great way to accumulate cash in the corporation. This course is great financial and tax planning as long as the personal life stays linear which is not the case.
Vancouver Tax Planning
The problem with prioritizing minimum taxes for the current year only plan is that it can backfire on you and the result is paying more taxes than otherwise. When cash is needed for a personal
purchase, all the funds are in the corporation and little in the shareholder’s hand. Example is when the young shareholder and spouse decide to buy a nice home to raise their family, there is
lack of personal funds to make the down payment. If large amount of fund is being drawn out at one point in time to make a large purchase, a much larger chunk of the draw will be taxed are the
highest tax bracket. Given the state of real estate prices in Canada, this has been the negative outcome for many young shareholders.
Tax Planning is More Than Minimizing Taxes for the Current Year
So rather than minimizing taxes for every current year, a wiser tax plan is to use up many of the “lower” personal tax brackets when tax planning. What is the “lower” tax bracket will be a warm
and fuzzy decision. Given the highest tax bracket is 53.5%, reporting income to reach the 40.70 tax bracket can be considered using up the lower brackets for some. For others, going all the way
to the highest tax bracket of 53.50 can be considered using up the lower tax brackets. Note that a marginal tax rate of 40.70 may only result in average taxes paid of less than 25% which is still a good average tax rate.
Taxpayers are given an opportunity to use up lower tax brackets every tax year under our progressive tax system and this should be taken advantage of. This is the tax efficient way to accrue cash personally for future big purchases.
Vancouver Corporate Tax Planning Services – Mew & Company
We’re Mew and Company, your Vancouver Chartered Accountants, and we’re here to help! Give us a call at 604-688-9198 and enjoy peace of mind, knowing you can depend on the experience and expertise of a professional chartered accountant.