Tax Planning challenges for Private Corporations – Items need to consider
- Income splitting with family members involved in the business;
- Investment income generated in Corporation from portfolio owned;
- Strategies that convert regular income or dividend income of a private corporation into capital gains, which are taxed at lower tax rates referred to as “surplus stripping”. Due to the many complications because of the complexity of the two imposed measures proposed, the government dropped this proposal as well;
- The proposal to constrain multiplication of the Lifetime Capital Gains Exemption (LCGE) has dropped this proposal as it would have significantly limited access to LCGE. However, the government will be looking at this tax planning with more stringent income tests for reasonability and age.
- Labor contributions made to the business are considered for individuals of any age that are receiving the income from a business of a related individual, with a more stringent test for the 18-24-year-old individual. This test looks at the extent to which the individual is actively engaged on a regular and continuous basis in the business.
- Capital investment contributions made to the business are also considered, with a more stringent test for the 18-24-year-old individuals. This test looks at whether the income earned on the contributions exceeds that computed at the CRA prescribed interest rate.
- Previous returns and remuneration (dividends and/or salary/wages) will also be considered in determining if the amount paid to the individual is reasonable.
- Holding a passive investment inside a private corporation is a strategy available to those earning enough business income to hold savings within a corporate entity. Generally, the unintended advantages are realized by higher-income individuals, such as those whose annual savings go beyond the limits of tax-assisted savings vehicles (such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs)).
- Conversely, many smaller or less profitable private corporations would not be in a position to make significant passive investments, after paying out an income to the shareholders, paying the owner and employees’ salaries, paying down their debts or reinvesting for future growth (such as by buying new, up-to-date equipment).