March 27, 2019 – Prime Minister Justin Trudeau announced programs and measures focused on helping Small & Medium Sized Businesses and Entrepreneurs cope with the economic consequences caused by the COVID-19 pandemic.
“With these new measures, our hope is that employers being pushed to laying off people due to COVID-19 will think again,” Trudeau said. “And for those of you who have already had to lay off workers, we hope you will re-hire them.”
Wage Subsidy increased to 75%
The Prime Minister has been under pressure from the small business community to boost the wage subsidy beyond the 10% initially announced to help keep people employed. Today, Mr. Trudeau announced the government will increase the wage subsidy from 10% to 75% to help keep employees on the payroll. This increase will be backdated to Sunday, March 15th.
“It is clear we have to do more, much more so we are bringing that percentage up to 75 per cent for qualifying businesses”
– Prime Minister Justin Trudeau
Canada Emergency Business Account (CEBA)
The CEBA will allow banks to offer $40,000 loans that will be interest-free for the 1st year which will be guaranteed by the government. If you meet certain conditions, $10,000 of the loan can be forgivable.
“To help you bridge to better times, we are launching the Canada Emergency Business Account. With this new measure banks will soon offer $40,000 which will be guaranteed by the government”
Defer GST, HST, Duty
The government will defer GST & HST payments, as well as duty and taxes owed on imports until June 2020.
“This is the equivalent of giving $30-billion of interest free loans to businesses”
Bank of Canada Rate Cut
Bank of Canada slashed its key overnight interest rate to 0.25%.
Full details and qualification requirements will be available on Monday.
As a business owner, you have the ability to pay yourself a salary or dividend or a combination of both. In this article and infographic, we will examine the difference between salary and dividends and review the advantages and disadvantages of each.
When deciding to pay yourself as a business owner, please review these factors:
How much do you need?
How much tax?
Other considerations including retirement and employment insurance.
How much do you need?
Determine your cash flow on a personal and corporate level.
What’s your personal after-tax cash flow need?
What’s your corporate cash flow need?
How much tax?
Figure out how much you will pay in tax. Business owners understand that tax is a sizeable expense.
What’s your personal income tax rate?
Depending on the province you reside in and your income, make sure you also include income from other sources to determine your tax rate. (Example: old age security, pension, rental, investment income etc.)
If you decide to pay out in dividends, check if you will be paying out eligible or ineligible dividends. The taxation of eligible dividends is more favorable than ineligible dividends from an individual income tax standpoint.
What’s your corporation’s income tax rate?
For taxation year 2020, the small business federal tax rate is 9% . Please also remember, if you pay out salary, salary is considered a tax-deductible expense, therefore this will lower the corporation’s taxable income versus paying out dividends will not lower the corporation’s taxable income.
If you pay yourself a salary, these options are available.
Do you need RRSP contribution room?
As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make.
Are you interested in contributing to the Canada Pension Plan?
This is unique to your circumstances and a cost-benefit analysis to determine the amount of contributions makes sense.
Do you need employment insurance (EI)?
For shareholders owning more than 40% of voting shares, EI is optional . There are situations worth careful thought such as maternity benefit, parental benefit, sickness benefit, compassionate care benefit, family caregiver benefit for children or family caregiver benefit for adults.
The infographic below summarizes the difference between Salary vs. Dividend.
We would also advise that you get in touch with your accountant to help you determine the best mix for your unique situation.
Now that we are nearing year end, it’s a great time to review your business finances. With the federal election over and no major business tax changes for this year, 2019 is a good year to make sure you are effectively tax planning. Please keep in mind that your business may be affected by the recent tax on split income (TOSI) and the passive investment income rules given they came into effect in 2018. These rules can be complicated, please don’t hesitate to consult us and your accountant to determine how this can affect your business finances.
We are also assuming that your corporate year end is December 31, however if it’s not, this is useful when your business year end comes up.
Below, we have listed some of the key areas to consider and provided you with some useful guidelines to make sure that you cover all of the essentials. We have divided our tax planning tips into 4 sections:
Individuals who own incorporated businesses can elect to receive their income as either salary or as dividends. Your choice will depend on your own situation consider the following factors:
Your current and future cash flow needs
Your personal income level
The corporation’s income level
Passive investment income rules
Please also consider the difference between salary and dividends:
✓ Provides RRSP contribution
✓ Reduces corporate tax bill
• Payroll tax
• Canada Pension Plan (CPP) contribution
• Employment Insurance contribution
• Doesn’t provide RRSP contribution
• Doesn’t reduce corporate tax bill
• No tax withholdings
• No Canada Pension Plan contribution
• No Employment Insurance contribution
✓ Receive up to $50,000 of ineligible dividends at a low tax rate depending on province
As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make. For 2019, salaries of $151,278 will provide the maximum RRSP room of $27,230 for 2020.
Is it worth accruing your salary or bonus this year?
You could consider accruing your salary and / or bonus in the current year but delaying payment of it until the following year. If your company’s year-end is December 31, your corporation will benefit from a deduction for the year 2019 and the source deductions are not required to be remitted until actual salary or bonus payment in 2020.
Stock Option Plan
If your compensation includes stock options, please check if you will be affected by the new proposed stock option rules. This caps the amount of certain employee stock options eligible for the stock option deduction at $200,000 after December 31, 2019. The rules will not affect you if your stock options are granted by a Canadian controlled private corporation.
Tax Free Amounts
If you own your corporation, pay tax-free amounts if you can. Here are some ways to do so:
Pay yourself rent if the company occupies space in your home.
Pay yourself capital dividends if your company has a balance in its capital dividend account.
Return “paid-up capital” that you have invested in your company
Do you employ members of your family?
Employing and paying salary to family members who undertake work for your incorporated business is worth considering as you could receive a tax deduction against the salary that you pay them, providing that said salary is “reasonable” in relation to the work done. In 2019, the individual can earn up to $12,069 and pay no federal tax. This also provides the individual with RRSP contribution room, CPP and allow for child-care deductions. Bear in mind additional costs that are incurred when employing someone, such as payroll taxes and contributions to CPP.
3) Business Tax
Claiming the Small Business Deduction
Are you able to claim a small business deduction? The federal small business tax rate decreased from 9% in 2019 (from 10% in 2018) and not anticipated to increase in 2020. From a provincial level, there will be changes in the following provinces:
Small Business Tax Rate
Therefore, a small business deduction in 2019 is worth more than in 2020 for these provinces.
Should you repay any shareholder loans?
Loaning funds from your corporation at a low or zero interest rate means that you are considered to have benefited from a taxable benefit at the CRA’s 2% interest rate, less actual interest that you pay during the year or thirty days after it. You need to include the loan in your income tax return, unless it is repaid within one year after the end of your corporation’s taxation year.
For example, if your company has a December 31st year-end and it loaned you funds on November 1, 2019, you must repay the loan by December 31, 2020, otherwise you will need to include the loan as taxable income in your 2019 personal tax return.
Passive investment income
If your corporation has a December year- end, then 2019 will be the first taxation year that the new passive investment income rules may apply to your company.
New measures were introduced in the 2018 federal budget relating to private businesses which also earn passive investment income in a corporation that also operates an active business.
There are two key parts to this, as follows:
Limiting access to dividend refunds. Essentially, a private company will be required to pay ineligible dividends in order to receive dividend refunds on some taxes which, in the past, could have been refunded when an eligible dividend was paid.
Limiting the small business deduction. This means that, for the companies mentioned above, the small business deduction can be reduced at a rate of $5 for every $1 over between $50,000 and $150,000 of investment income, or eliminated if investment income exceeds $150,000. Please note that Ontario and New Brunswick have indicated that they will not follow the federal rules.
If your corporation earns both active business and passive investment income, you should contact us and your accountant directly to determine if there are any planning opportunities to minimize the impact of the new passive investment income rules.
Think about when to pay dividends and dividend type
When choosing to pay dividends in 2019 or 2020, you should consider the following:
Difference between the yearly tax rate
Impact of tax on split income
Impact of passive investment income rules
With the exception of 2 provinces, Quebec and Ontario, the combined top marginal tax rates will not be changing from 2019 to 2020 on a provincial level. Therefore, it will not make a difference if you choose to pay in 2019 or 2020.
Combined Marginal Tax Rate
In Quebec and Ontario, because there are slight increases in the combined marginal tax rate, there are potential tax savings available if you choose to pay dividends in 2019 rather than in 2020.
When deciding to pay a dividend, you will need to decide to pay out eligible or ineligible dividends, you should consider the following:
Dividend refund claim limits: Eligible refundable dividend tax on hand (ERDTOH) vs Ineligible Refundable dividend tax on hand (NRDTOH)
Personal marginal tax rate of eligible vs. ineligible dividends
Given the passive investment income rules, typically, it makes sense to pay eligible dividends to deplete the ERDTOH balance before paying ineligible dividends. (Please note that ineligible dividends can also trigger a refund from the ERDTOH account.)
Eligible dividends are taxed at a lower personal tax rate than ineligible dividends (based on top combined marginal tax rate). However, keep in mind, when ineligible dividends are paid out, they are subject to the small business deduction, therefore the dividend gross-up is 15% while eligible dividends that are subject to the general corporate tax rate have a dividend gross-up is 38%. It’s important to talk to a professional to determine what makes the most sense when determining the type of dividend to pay out of your corporation.
Combined Personal Top Marginal Tax Rate on Dividends
Corporate Federal Tax Rate and Gross-up factor
It might be time to revisit your corporate structure given the changes to private corporation rules on income splitting and passive investment income to provide more control on the distribution of dividend income. Another reason to reassess your structure is to segregate investment assets from your operating company for asset protection. (Keep in mind you don’t want to trigger TOSI, so make sure you structure this properly.) If you are considering succession planning, this is the time to evaluate your corporate structure as well.
Ensure your will is up to date
In particular, if your estate plan includes an intention for your family members to inherit your business, ensure that this plan is tax effective following new tax legislation from January 1, 2016. In addition, review your will to make sure that any private company shares that you intend to leave won’t be affected by the new TOSI rules.
Consider a succession plan to ensure your business is transferred to your children, key employees or outside party in a tax efficient manner.
Lifetime Capital Gains Exemption
If you sell your qualified small business corporation shares, you can qualify for the lifetime capital gains exemption (In 2019, the exemption is $866, 912) where the gain is completely exempt from tax. The exemption is a lifetime cumulative exemption; therefore, you don’t have to claim the entire amount at once.
The issues we discussed above can be complex. Contact us and your accountant if you have any questions, we can help.
Financial Planning for business owners is often two-sided: personal financial planning and planning for the business.
Business owners have access to a lot of financial tools that employees don’t have access to; this is a great advantage, however it can be overwhelming too. A financial plan can relieve this.
A financial plan looks at where you are today and where you want to go. It determines your short, medium and long term financial goals and how you can reach them. For you, personally and for your business.
Why do you need a Financial Plan?
Worry less about money and gain control.
Organize your finances.
Prioritize your goals.
Focus on the big picture.
Save money to reach your goals.
For a business owner, personal and business finances are connected. Therefore both sides should be addressed: Personal and Business.
What does a Financial Plan for a Business include?
There are 2 main sides your business financial plan should address: Growth and Preservation
Cash Management- Managing Cash & Debt
Tax Planning- Finding tax efficiencies
Retaining & Attracting Key Talent
Investment- either back into the business or outside of the business
Insurance Planning/Risk Management
What does a Personal Financial Plan include?
There are 2 main sides your financial plan should address: Accumulation and Protection
Cash Management – Savings and Debt
What’s the Financial Planning Process?
Establish and define the financial planner-client relationship.
Gather information about current financial situation and goals including lifestyle goals.
Analyze and evaluate current financial status.
Develop and present strategies and solutions to achieve goals.
Monitor and review recommendations. Adjust if necessary.
Talk to us about helping you get your finances in order so you can achieve your lifestyle and financial goals.
Feel confident in knowing you have a plan to get to your goals.
Business owners deal with a unique set of challenges. One of these challenges includes succession planning. A succession plan is the process of the transfer of ownership, management and interest of a business. When should a business owner have a succession plan? A succession plan is required through the survival, growth and maturity stage of a business. All business owners, partners and shareholders should have a plan in place during these business stages.
We created this infographic checklist to be used as a guideline highlighting main points to be addressed when starting to succession plan.
Determine your objectives- what do you want? For you, your family and your business. (Business’ financial needs)
What are your shares of the business worth? (Business value)
What are your personal financial needs- ongoing income needs, need for capital (ex. pay off debts, capital gains, equitable estate etc.)
There are 2 sets of events that can trigger a succession plan: controllable and uncontrollable.
Sale: Who do you sell the business to?
There are advantages and disadvantages for each- it’s important to examine all channels.
Retirement: When do you want to retire?
What are the financial and psychological needs of the business owner?
Is there enough? Is there a need for capital to provide for retirement income, redeem or freeze shares?
Does this fit into personal/retirement plan? Check tax, timing, corporate structures, finances and family dynamics. (if applicable)
Divorce: A disgruntled spouse can obtain a significant interest in the business.
What portion of business shares are held by the spouse?
Will the divorced spouse consider selling their shares?
What if the divorced spouse continues to hold interest in the business without understanding or contributing to the business?
If you have other partners/shareholders- would they consider working with your divorced spouse?
Illness/Disability: If you were disabled or critically ill, would your business survive?
Determine your ongoing income needs for you, your spouse and family. Is there enough? If there is a shortfall, is there an insurance or savings program in place to make up for the shortfall amount?
Will the ownership interest be retained, liquidated or sold?
How will the business be affected? Does the business need capital to continue operating or hire a consultant or executive? Will debts be recalled? Does the business have a savings or insurance program in place to address this?
Death: In the case of your premature death, what would happen to your business?
Determine your ongoing income needs for your dependents. Is there enough? If there is a shortfall, is there an insurance or savings program in place to make up for the shortfall amount?
Will the ownership interest be retained, liquidated or sold by your estate? Does your will address this? Is your will consistent with your wishes? What about taxes?
How will the business be affected? Does the business need capital to continue operating or hire a consultant or executive? Will debts be recalled? How will this affect your employees? Does the business have a savings or insurance program in place to address this?
Execution: It’s good to go through this with but you need to get a succession plan done. Besides having a succession plan, make sure you have an estate plan and buy-sell/shareholders’ agreement.
Because a succession plan is complex, we suggest that a business owner has a professional team to help. The team should include:
Financial Planner/Advisor (CFP)
Succession Planning Specialist
Chartered Life Underwriter (CLU)
Contact us about helping you get your succession planning in order so you can gain peace of mind that your business is taken care of.
Business owners are increasingly recognizing the key importance of implementing employee benefit plans in their organization and this is an area that has grown considerably in recent decades. Employee benefits comprise all of the additional things that you offer to your employees on top of their regular salary, which could include pension contributions, health cover / insurance policies, training and education programs etc. Employees are more and more interested in the total benefits package that a potential employer can offer them, rather than just being focused on a binary salary figure and recognizing and understanding this cultural shift in the modern working world is crucial to maintain your ability to recruit and retain the right talent for your business.
Many employees value the benefits that their employer offers, considering them an integral part of their take home pay, none more so than health cover. This benefit can provide financial and emotional security to your employees and their families, without the need for them to complete any health requirements to be on the plan. They are likely to benefit from a preferable level of cover and the plan may even provide them with insurance products such as long-term disability cover, which can be harder to gain outside of a group plan. What’s more, group plans often offer out-of-country emergency healthcare for employees which has the potential to save them money on personal travel insurance products.
Not only do these benefits provide a sense of security to your employees, they can also help them to feel valued as part of your organization, which may in turn foster higher morale and increased motivation within their roles. It is therefore worthwhile for business owners to encourage their teams to recognize the fact that the benefits package that you offer should be considered as an integral part of their take home pay, alongside their actual salary.
As a business owner, you’ve built a successful business, if you to any of your key employees or shareholders become critically ill, disabled or pass away, this could have a significant impact on your business.
Key person insurance helps financially alleviate concerns from lenders, customers and employees that your business will continue in case an unfortunate event should occur.
As our lives grow and change with variable circumstances, new additions, and job transitions, our needs for insurance will also evolve. Additionally, economic fluctuations and external circumstances that influence your insurance policy will need frequent re-evaluation to ensure that you are making the most appropriate and financially favorable decisions. Perhaps you aren’t sure whether you should conduct an insurance audit or not. The following scenarios are usually a good indication that you should thoroughly assess and review your current policy contract:
Bringing new life into your family? A new baby may not only prompt you to adjust your beneficiary information, but it is likely to change or influence your coverage needs.
Changing jobs? Probationary periods may not provide the same level of disability or accident insurance.
Is your policy nearing the end of its term? Be sure to compare prices for new policies as they can sometimes be more affordable as compared to renewing the current plan.
Has your marital status changed? Your insurance policy will likely need updating to reflect such.
The specific type of insurance policy you carry as well as personal details certainly influence coverage and premium prices, so if any of the following factors apply to you, be sure to update your policy accordingly. You might be eligible for a rate reduction.
Changes to your overall risk assessment like smoking cessation, dangerous hobbies, high risk profession etc.
If you have experienced improvements to a previously diagnosed health condition.
Do your policy’s investment options still fall in line with current market conditions?
Have you used your insurance policy as collateral for a loan? Once that loan is paid off, collateral status should be taken off the policy.
Insurance policies generated for business purposes should also be regularly reviewed to make sure the policy still offers adequate coverage to meet the needs of the company and includes the appropriate beneficiary information. With life happening so quickly, it can be easy to forget about keeping insurance policies up to date, however, major changes can have a profound impact on coverage and premiums. Be sure to conduct insurance audits often to ensure your policies are still meeting your needs.