BUSINESS CAN BE TAXING: HOW TO AVOID COSTLY PITFALLS THIS TAX SEASON
New ederal income tax rates aecting Personal Services Businesses (PSBs) have signifcantlyreduced the tax deerral rom incorporation and increased the tax costs o earning incomein the corporation and later distributing it as dividends. For taxation years beginning aterOctober 31, 2011, a PSBs’ income is subject to a ederal income tax rate o 28 percent versusthe general ederal active business income tax rate o 15 percent or 2012 and beyond. Thismeans that the tax deerral opportunity rom incorporation has been signifcantly reduced,and the tax cost o earning income in the corporation and later distributing it as dividendshas increased. I you’ve been utilizing a PSB, it may be worthwhile speaking with a businessadvisor to determine the best way to manage your tax obligations going orward.
I you’re an Incorporated Independent Contractor, you could be at risk o losingthe tax deerral opportunity rom incorporation. Also, the tax cost o earningincome in the corporation and later distributing it as dividends has increased.
Some businesses use Employee Proft-Sharing Plans (EPSPs) as a substitute or salariesor bonuses, oten to deer tax and/or avoid the Canadian Pension Plan premiums thataccompany conventional employment earnings. The 2012 budget introduced signifcantchanges to the taxation o EPSP allocations rom closely held employers, generally wherethe employee either holds at least a 10 percent interest or does not act at arm’s length tothe employer. Business owners using EPSPs should consider the implications o these newprovisions or their 2012 return and in uture years as the CRA is aware o the increased useo this strategy and are auditing heavily, oten issuing unavourable reassessments.
The 2012 budget introduced signifcant changes to the taxation o EPSP allocationsrom closely held employers. Business owners using EPSPs should consider theimplications o these provisions or their 2012 return.
Generally, a Canadian-controlled private business can earn Investment Tax Credits (ITCs)o 35 percent up to the frst $3 million o eligible expenses or Scientifc Research andExperimental Development (SR&ED) carried out in Canada, and 20 percent on any excessamount. Other Canadian corporations, proprietorships, partnerships and trusts can earnan ITC o 20 percent o qualifed expenditures or SR&ED carried out in Canada. This is areundable tax credit, which means that even i your business does not turn a proft, you willget the appropriate reund back in cash.Industries including manuacturing and technology have been traditional beneactors o the program; however, many companies in the oil and gas production and service industriescan also qualiy. Even medical proessionals can obtain credits. You may not think you’rein the business o innovation but i you’re investing and trying to improve processes andefciencies, you could be eligible or the credits and this could lead to signifcant savings.
Innovators can see hety returns to their business by earning Investment TaxCredits on up to $3 million dollars o eligible expenses or Scientifc Researchand Experimental Development (SR&ED) carried out in Canada.
DON’TOVERUSE EMPLOYEE PROFIT-SHARINGDOUSE SR&ED TAX CREDITSDOBEWARE OF NEW PSB TAX RATES