4 small business owner tax tips

4 Small Business Owner Tax Tips

by BusinessLifestyleTax PlanningUncategorised

Being an entrepreneur is quite different from working for a large company in many ways. One particular way that stands out from the rest is the responsibility to maintain and file taxes. Unless you happen to own an accounting or auditing firm, there may be more questions than answers when it comes to how to complete and record everything to do with taxes successfully. Although tax season happens once a year, it is a round the calendar job to keep track of every dollar spent and ensure that taxes are adequately claimed to help bring down your taxes owing. Here are some tips for small business owners that are sure to help you sort out your tax situation.

Keep Every Business Receipt

Although it may seem like a daunting task to begin with, it is imperative that you save every meal, gas, parking, equipment purchase, and any other receipt which has a relationship to your business. It’s easier to rifle through your many business receipts than to not have them and not be able to claim them when the time comes.

Be Mindful of Meal Prices

It is absolutely permitted to claim meals as part of your business expenses, however be mindful of the cost. The Canada Revenue Agency (CRA) is cracking down on business meals submitted for tax write-offs that are more than $100 per person. To avoid catching the watchful eye of the CRA, do not submit any meal receipts where more than $100 is spent on each guest.

Convention or Furthering Education Programs

It is expected that conventions or furthering education programs directly related to your field should be attended and can be deducted as a tax write-off. The key to remember is that only reasonable expenses will be accepted. If there is a three-day conference held somewhere where travel is required, however you decided to stay for seven nights and have a vacation out of the time away, it is only possible to submit three nights as a business expense.

Knowing What Can Be Deducted

Having the knowledge of what is an acceptable deductible and what is unacceptable is an important part of taxes. If taxes are not your area of expertise, it will be beneficial to you to speak to someone who is an expert in the field.

As a small business owner you likely wear multiple hats. When it comes to taxes, however, it’s best to have a professional help you out. At The Beacon Group of Assante Financial Management Ltd. there will always be someone available to assist you with managing your small business taxes.

Avoiding Hidden Tax Liability for Your Heirs

Avoiding Hidden Tax Liability for Your Heirs

by InheritanceTax Planning

Let’s say you bought a cabin in the Rockies many moons ago for $80,000. The property has already tripled in value, and by the time you pass you expect it will be worth about $400,000. The capital gain on your cozy cabin is $320,000. With a marginal tax rate of 45%, a capital gains tax of $72,000 would be due. Rather than enjoying family retreats at the cabin, your heirs may have to sell the property in order to be able to pay this tax.

This is just a hypothetical scenario, but it happens all too often, and not just with real estate property. Any successful investments or businesses that have multiplied in value will be subject to hefty capital gains taxes.

You can avoid these substantial tax liabilities by understanding how capital gains tax is applied and calculated, and to which assets the tax will apply. Next, you can prepare for capital gains tax as part of your estate planning by leaving funds to cover the tax after you’re gone.

Calculating Capital Gains Tax

Capital gain is the difference between the fair market of an asset (like a home, business, or stock) at the time of your death and the price you paid for it, with some minor variances depending on the asset. Capital gains tax is 50% of the value of the capital gain, as demonstrated in our earlier cabin example. Capital gains tax applies to property like non-registered investments, real estate other than your principal residence, share or partnership in a family business, and personal assets like vehicles, jewellery, and artwork.

Offsetting the Tax Liability For Your Heirs

A common way to offset the expected tax liability is to purchase a life insurance policy that names your heirs as beneficiaries. This policy should be insured for an amount that sufficiently covers the expected capital gains tax.

This is a wise strategy as insurance proceeds are tax-free and do not go through probate. With a guaranteed payout and affordable premiums, life insurance is generally recommended ahead of alternatives. Considering the downsides of having to pay interest on a loan or selling the assets below market value, life insurance is the best option for offsetting the tax liability.

RRSP/RRIF Tax Liability

Beyond capital gains tax, you must also account for the potential tax liability when your Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) transfer into your income. You can defer taxation by transferring the funds into the RRSP/RRIF of your spouse or financially dependent child. Alternatively, you may wish to donate the proceeds of your registered plans to a designated charity. While charity donations are ordinarily limited to 75% of net income, you may donate 100% of net income in the year or immediately preceding year of your death.

It is extremely important to consider the tax liability during the estate planning process. As part of The Beacon Group of Assante Financial Management Ltd.’s Lifetime Legacy Advantage, we will help you develop estate planning strategies that provide your heirs with a secure future.

A Tax-Smart Guide to Giving Grandchildren Gifts

A Tax-Smart Guide to Giving Grandchildren Gifts

by InheritanceTax Planning

You love your grandchildren and you spoil them rotten, but beyond frivolous gifts like candy and toys, you would love to give them a good financial start in life by gifting them money. It goes without saying that a cash gift is not nearly as exciting as a new bike, but your grandchildren will greatly appreciate the help down the road. You will gain the satisfaction of seeing your gift make a real difference in your loved ones’ lives. It can also bring you financial benefits, as long as you are aware of the rules. Here is what you need to know about gifting money to your grandchildren:

Attribution

There is no initial gift tax in Canada, so no amount is payable after you give the gift to your child. However, if the money is gifted to a minor child and it is held in a non-registered investment account, any income generated by that gift money is attributed to you. Any capital gains are taxed to the child. No attribution applies if your grandchild is an adult.

In order to make your gift tax-effective and avoid attribution, you should contribute cash into their Registered Education Savings Plan, Tax-Free Savings Account, or Registered Retirement Savings Plan. RESPs, TFSAs, and RRSPs guarantee you won’t have to pay any tax on your gift and investments in these plans will grow and compound in a tax-deferred/tax-free environment.

Registered Education Savings Plan (RESP)

For RESPs, tax on income and growth is deferred. The tax becomes payable upon withdrawal, but it will fall into your grandchild’s hands and not yours. Make sure you plan this kind of contribution with the child’s parents so that you don’t exceed the contribution limit. Your financial advisor can help you come up with other strategies for flexibility, such as taking advantage of the maximum Canadian Education Savings Grant (CESG) with a $2,500 yearly contribution to an RESP.

Tax-Free Savings Account (TFSA)

If you want to avoid paying tax on funds that you intend to gift through your will, you can contribute that money to an adult grandchild’s TFSA tax-free. Canadians are allowed to make contributions to their TFSA after they turn 18.

Registered Retirement Savings Plan (RRSP)

Cash gifted into your grandchild’s Registered Retirement Savings Plan can grow and compound tax-deferred until they take advantage of it. The Home Buyer’s Plan allows first-time home buyers to withdraw money from their RRSP to put towards purchasing a home. The Lifelong Learning Plan allows you to take money from your RRSP to pay for full-time education. It’s also important to make sure there is enough contribution room available before giving the gift.

Contact a financial advisor at The Beacon Group of Assante Financial Management Ltd. today to help you sort out the best options for giving your loved ones the gift of financial security.

How to Cope With the Sandwich Generation Squeeze

How to Cope With the Sandwich Generation Squeeze

by AgingEducationFinancial PlanningInheritanceInvestment PlanningTax Planning

 

Picture a sandwich. The top slice of bread is the responsibility of taking care of your elderly parents. The bottom slice is your young adult children who have boomeranged back home or are involved in post-secondary education. You are the meat stuck in the middle, trying to take care of both while working towards your retirement. This, in a nutshell, is the crisis the “sandwich generation” faces today. If you find yourself in this situation, take heart that you aren’t alone and you have people fighting for your best interests. The following are steps you can take to manage being stuck in the middle of caring for two generations:

Eldercare

The health insurance provided by the government leaves many elements of care uncovered or only partially covered, including nursing care at home. If one parent is still independent of you, you may wish to ask this parent to sell their home in order to downsize for extra monthly cash flow. If you are personally assisting your parent with their care, there is community care available in most regions and there is always private caregiving assistance.

Kids’ Education

The cost of post-secondary education is rising every year. Parents with two children that are close in age really feel the squeeze when both kids are enrolled at college or university.

The first step is to plan ahead and start investing early in Registered Education Savings Plan (RESP). You should consider supplementing the RESP with Tax-Free Savings Account (TFSA) investments, family trusts, in-trust accounts, or a combination of these. The Beacon Group of Assante Financial Management Ltd. can help you reach your education savings goals.

Boomerang Kids

25.9%[1] of young adults in Canada between the ages of 25 to 29 live at home with their parents. This boomerang generation can burden their parents with extra cost or prevent them from a planned downsize of their home. The key to handling this situation is communication. Talk openly with your adult children about their plans, responsibilities, and expectations to help maintain a healthy relationship with them.

Contingency fund

Nobody can predict the future. You should consider setting money aside during your prime working years to cover the potential costs of supporting your parents or adult children. The Beacon Group of Assante Financial Management Ltd. can develop a plan to help alleviate the pressures of being in the sandwich generation while setting your family up for future care as well.

 

[1] Statistics Canada, Living Arrangements of Young Adults Aged 20 to 29 (2011 Census)

Tax-Smart Charitable Donations

Tax-Smart Charitable Donations

by Tax Planning

In Canada, you are able to support helpful charities in a number of different ways. If you go over your donation plan strategically, you can optimize the benefits to both yourself and the charities that mean the most to you. Read on to learn more about strategies involving charitable donations:

Life Insurance Proceeds

If you have permanent life insurance, you are able to donate these proceeds to the charity of your choice, leaving a sizeable donation in your name that can really make a difference. Doing so will allow you claim the Charitable Donation Tax Credit on your annual premiums you pay, or you could choose for your estate to receive a tax credit after you pass away.

Donate Investments

You can donate your investments to a charity as well. If your investment has increased in price, it will come with the added benefit of being exempt from capital gains tax. If your investment has gone from $10,000 to $20,000, you can donate the $20,000 tax-free and also claim a Charitable Donation Tax Credit of $20,000 as well.

Combining Donations

The Charitable Donation Tax Credit is only 15% of your donation for the first $200 donated. Donations made after that are credited at 29%, a significant difference. If you pool all of the donations that you made, you are able to increase the amount of money that is credited at 29%. You are able to combine donations with your spouse and have one person claim the tax credit. It is important to remember that the maximum donation you can claim in one year is 75% of your annual net income (or 100% on the year of your death, or the previous year). Thankfully, you can carry donations forward for up to five years if you need to.

New Rules for 2016

There have been some important changes to donations made upon death, as of January 1st 2016. Previously, tax credits were applied to your final tax return, with all remaining credits applied to the previous year. The donation can now be allocated to the tax year of the estate, a previous tax year of the estate along with the last two years of the individual.

These aren’t the only charitable donation strategies available to you. For advice on how to make the best use of your charitable donations, you should contact a financial advisor at The Beacon Group of Assante Financial Management Ltd.

How Do You Use Your TFSA?

How Do You Use Your TFSA?

by FinancialFinancial PlanningTax Planning

The recent federal election brought the Tax-Free Savings Accounts (TFSA) into the spotlight. The Liberals promised to lower the contribution limit from the Conservative Government’s $10,000 to $5,500. The Liberal government followed through with their promise, so the 2016 TFSA limit is now $5,500. Thankfully, Canadians aren’t losing the contribution room they’ve accumulated, so somebody opening an account today would be able to put in $46,500. The real question isn’t about how much room you have, but rather how to properly make use of the tax-free incentive. Read on to learn more about how to best use the TFSA to your advantage.

The Holistic Approach

We find that a lot of Canadians have “tunnel vision” when it comes to the TFSA. It’s much more effective to take a look at the big picture when deciding how to use the TFSA. You need to take your life goals and long-term financial plans into consideration first, and then make investment choices that will help you meet your objectives on time with an acceptable amount of risk tolerance. With that in mind, it will be easier for you to determine the securities you need to invest in, and if they are to be allocated in non-registered or registered accounts.

Short-Term Goals

If you are planning on, for example, purchasing a new car in the next five years, it would make a lot of sense to use some of your TFSA room for that goal. It would not make sense to then invest aggressively, as a risky investment could mean that there won’t be enough money in the account when the time comes for your purchase. It would be better to invest in conservative holdings to ensure some growth but also to have peace of mind knowing you will have the money when it’s needed.

Long-Term Goals

If you are looking to use your TFSA as a source of retirement income, or for other long-term goals, it would be wise to take a holistic approach instead of just focusing on one kind of account or one type of investment. In order to best save for your retirement, it’s a smart idea to build your nest egg strategically, with fixed income holdings and equity spread across different accounts. Investors should make the best use of the Registered Retirement Savings Plan (RRSP), TFSA and non-registered accounts to ensure tax-efficiency and flexibility.

Navigation through the world of registered and non-registered investments can be tricky. If you need help with your investment planning strategy, you should contact The Beacon Group of Assante Financial Management Ltd. today.

Taxes and Succession Planning

Taxes and Succession Planning

by FinancialFinancial PlanningLife ChangesTax Planning

You spend your whole life paying taxes, why should the last step into retirement be any different? As you prepare yourself and your company to be transitioned to the next generation of owners and operators it’s important to plan for the taxes associated with your succession plan. Be certain to discuss with your financial advisor and legal counsel to determine which succession plan is best for your tax situation. Here is a brief look into a few options available to someone who is wishing to retire or sell their business.

Selling shares held in your own name to an outside party

You are able to sell personally held shares, but they are subject to a capital gains tax. There is a lifetime exemption of $750,000.00 in qualified small business corporation shares that you may be able to apply to the sale of your business. This is a possible way to offset a portion of the capital gains tax; this should be discussed with your financial advisor.

Selling corporate assets or corporately-held shares to an outside party

Another option for selling the company is to sell the corporate assets or the shares of the business held by a corporation or a holding company. The types of assets sold and the amount of income generated by the sale will determine how the taxes are to be treated. Once the corporation has liquidated all of its assets and no longer operates, you can choose to either dissolve the corporation or keep it operating to hold some of the revenue generated from the sale as a way of deferring taxes. This income can be paid to shareholders as dividends over the course of time.

Estate Freeze

This method is best for transferring the ownership to a chosen successor, not an outside party. This is typically done by transferring the common shares into preferred shares and then issuing common shares to the beneficiaries. This essentially freezes the tax liability and allows the successor to come into the business with little investment contribution. This is a commonly used practice when it’s a family business and the next generation is taking over.

Succession planning can be an exciting time because it means the next chapter in your life is on the horizon. But be certain to plan closely with your financial advisor from The Beacon Group of Assante Financial Management Ltd. in order to achieve the most tax beneficial and best plan available to you and your company.

The Federal Budget and Your Small Business

The Federal Budget and Your Small Business

by BusinessFinancialTax Planning

The recent federal election brought Canada a new Liberal government, and with that came the promise to invest in the Canadian economy. What does this mean for small business owners in Canada? The new budget has brought upon some changes that are favourable to small businesses as well as some guarantees that life will not be made more difficult for small businesses from a tax perspective. It means that things have not necessarily changed for the better or for the worse. Here’s a small breakdown of what Canadian small business owners can expect going forward.

No Changes to Capital Gains Inclusions and Stock Options

Prior to the release of the federal budget there was concern that the capital gains inclusion rate would increase from its rate of 50% and that there would be changes to stop option benefit rules. The good news is that the release of the federal budget shows no changes to either the stock option rules or the capital gains inclusion rate.

Corporate Tax Rates

The bane of all small businesses is the amount of taxes owed to the government every quarter. The federal budget shows no changes to the tax rates on small corporations which is a relief because the proposed deficit needs to be answered for somewhere and small business owners are glad it’s not at their expense.

Small Business Deduction

Various loopholes have now been closed with respect to the previously allotted small business deductions. The small business deduction is available to businesses who earn less than $500,000.00 annually; the tax rate is 15% and can provide tax savings of up to $55,000.

Transferring Life Insurance

It used to be that you were able to transfer life insurance policy to a corporation and thereby obtain tax-free corporate money. The new federal budget has done away with this loophole and no longer allows it to occur. There may also be an inquiry to examine policies that did this prior to the release of the 2016 federal budget.

Life can go on normally for small business owners in Canada with the implementation of the 2016 federal budget. Many of the changes made were not harmful or costly to small business owners and are simply just procedural updates. The Liberal Government is being true to their word on the notion of building up the Canadian economy and providing support for small businesses.

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Making Your Tax Refund Work for You

by FinancialTax Planning

Are you expecting a nice, big tax refund for the 2015 tax year? If you are, you are probably thinking about how you can spend this free money. You shouldn’t think of a tax refund as free money, because it is really just money that the government owes you because you overpaid on taxes. This is money you could’ve been using to save, pay off debts, or invest throughout the year. Because of this, we highly recommend you use your refund for one of the following reasons.

Pay off Debts

The first thing you should do with your tax refund is use it to pay off any outstanding credit card debt. A standard credit card has an interest rate of 19.99%, so for example, if you carry a balance of $5,000 for a year, you are paying almost $1,000 in interest. If you pay off your balance with your tax refund, you will be saving more than you could if you invested it.

Contribute to your retirement savings

If you have contribution room left in your Registered Retirement Savings Plan (RRSP), you can add that amount to it in order to generate a higher tax deduction for the current year’s tax return. Of course, the main goal of an RRSP investment is to save towards your retirement, but the immediate tax boon is icing on the cake.

Save for your child’s education

If you’ve been neglecting saving for your children’s post-secondary education, now is as good a time as any to start. By contributing to a Registered Education Savings Plan (RESP), you can also take advantage of the Canada Education Savings Grant (CESG) which adds an additional 20% towards your plan.

Invest tax-free

Why not continue the trend of saving on taxes by using your tax refund to invest in a Tax-Free Savings Account (TFSA)? There are no tax deductions for contributing to a TFSA, so earnings and withdrawals from the account are tax-free. Much like RRSPs, the TFSA has a contribution limit, so it is best to make sure you don’t over-contribute, as any excess TFSA amount is taxable.

Of course, it’s OK to indulge if that shiny new 4K HD TV is too hard to pass up. In this case, you can consider enjoying the best of both worlds by buying a new toy and using the rest to solidify your financial future. For help determining how to best use your substantial tax refund, contact a financial advisor at The Beacon Group of Assante Financial Management, Ltd.