When you’re looking for ways to keep more money in your pocket, cutting your tax bill might be high on your list. Canadian tax loopholes still exist and are legal, although the Canada Revenue Agency (CRA) watches for suspicious activity. If you follow the rules and work closely with a good accountant, you can take full advantage of the current revenue codes to lower your tax liability and stay on the right side of the Canadian tax code. Here are three methods for cutting your taxes when the fiscal year ends or when selling or dissolving your business.
Outsized Charitable Donations Under the Canadian Tax Code
Charitable donations are a common way to reduce tax bills, but what if for each dollar you give, you receive a receipt for four times the amount of the donation? Through a series of complex offshore maneuvers, gifted trust arrangements meted out $175 million in charitable receipts to about 6,000 taxpayers. This little-known but intensely scrutinized program involves only a few select charities that receive income streams over 20 years from a percentage of donations parked in a hedge fund. Despite CRA warnings, the organizer of the trust arrangement maintains that the strategy holds up against any legal wrangling. These shelters, such as Donations for Canada, offer a potential tax avoidance strategy, but it’s wise to proceed cautiously, as regulations may change.
Incorporation and Succession Plans
By incorporating your small business, you can distribute shares of your business to family members or to a trust set up for their benefit. The primary objective of an estate freeze is to avoid significant capital gains levied when the owner passes away. If your timing is early enough and you expect your business to grow in value, the company’s increasing value is attributed to shares the trust holds. At the same time, the value of the shares representing ownership interest “freezes,” or technically stays the same. This arrangement limits the amount of your capital gains tax as a small business owner and exempts family members from large amounts of taxes when you sell your business or pass away.
Family Matters and the Canadian Tax Code
Small business often means family business, and you might employ your spouse or children. In addition to keeping the daily business operations in trusted hands, this approach offers a way of saving on taxes. The Canadian tax code recognizes two principal methods that let you draw income from the business:
- Taking a salary
- Paying yourself dividends
Both options are taxed at rates that may be higher than for your spouse or child. So being generous to your most cherished employees serves as another great option from the list of tax avoidance strategies. The more money you funnel through your employee family members, the fewer dollars you may owe the CRA.
Taking advantage of tax loopholes in the Canadian tax code for small business owners like you is a legal way of building wealth now and for your future. QuickBooks Online can help you maximize your deductions. Keep more of what you earn today.