The summer is almost over and June 30 – the dividing line in the yearly calendar for many businesses – came and went a few months ago.
For some, the end of June is the half-year mark, while for others, it's the end of the first quarter. Regardless of a company's specific year end, the six-month period is an important milestone.
Too many businesses let the mid-point of the year go by without considering where they stand financially. Owners often discover they have a financial issue when it's too late to take action — such as three months after their fiscal year-end. It sounds basic and it is: sometimes the simplest financial decisions elude the most sophisticated owners.
The solution? Arrange a meeting with your accountant in late July or early August, shortly after the half-year mark, as soon as your six-month internal financial statements have been completed.
While quarterly meetings are ideal, semi-annual meetings should be the minimum standard. There will be some important numbers from the first six months to review, and you will be in a good position to forecast and plan for the balance of the year with your adviser. A world of financial opportunities will open up. Two of the major ones include tax and remuneration planning,
The Canada Customs and Revenue Agency (CRA) demands that businesses pay corporate taxes equal to at least what was paid in the prior year. But if you are making more profit – or less profit in the current year than in the prior year – it can create a completely different set of considerations. If there were more profit, prudent planning would call for setting aside additional funds to finance the added tax burden at the end of the year, especially to smooth out your cash flow and avoid interest and penalties.
But if you are making less, preserving your cash flow by reducing your instalments may provide the added liquidity for the balance of the year.
Whatever you do, remember this: cash flow is king. Making pro-active choices in real time will maximize this precious resource. In the end, a big fat tax liability owed to the government can be hard to swallow for any business owner. But this type of liability can be avoided, or at least mitigated, with advance planning, as there are tax-saving strategies that can be implemented now to avoid tax in the future.
Some tax-planning considerations include:
1. Other than for very small businesses, there are significant advantages to earning income in a corporation, minimizing the total combined corporate and personal tax bill each year. For a company earning $500,000 profit, the amount of corporate tax paid is about $155,000 less than the tax that would be owed by an individual earning the same $500,000 in self-employed net income or salary.
Of course, these funds have not been removed from the company by the owner and they are not yet available for personal use. However, for companies that need to retain funds for growth or expansion, this is the only tax that needs to be paid until the owner removes the funds.
2. If your company makes more than $500,000 in taxable income annually, consider whether to "bonus down" to the $500,000 small-business limit, as this may no longer be a wise strategy. In the past, the general tax strategy of businesses with income in excess of $500,000 was to pay a bonus to the owner or owners of the business to bring the taxable income down to $500,000, and avoid the "high rate" corporate tax.
But in recent years, the "high rate" corporate tax has been reduced to approximately 31 per cent, and it is dropping to 25 per cent by 2014. Given these reductions in tax rates, it may no longer be the most effective strategy to "bonus down" to $500,000. This is particularly true if the funds are not required personally and cannot be removed from the company due to cash flow, reinvestment or banking covenant requirements.
3. With proper advance planning, it is possible to eliminate or significantly reduce the tax on a sale of the company's shares. Consider having other family members own shares – spouse, children, or a trust for spouse and/or children – either directly or indirectly. For example, if at the time a business was started, a husband, wife and their two children owned equal shares directly or indirectly, and the company was considered a Qualifying Small Business Corporation under CRA rules, then a subsequent sale of the business for $3-million would result in virtually no personal income tax.
Each of the four shareholders would be able to utilize their individual $750,000 lifetime capital gains exemption. This is the ideal scenario, but even if the ownership of the business was not structured this way from the beginning, it can be amended to enable future growth in value to benefit the new shareholders, sheltered from tax on a subsequent sale.
To be certain, business owners should involve pro-active professional advisers when implementing tax minimization strategies in their business. Effective tax planning cannot be done retroactively. Make sure there is planning for tax minimization before the end of the year, and ideally throughout the year to maximize your savings.
Special to The Globe and Mail
Mitch Silverstein is a senior partner at SBLR LLP Chartered Accountants. SBLR provides strategic tax planning, business advisory and assurance accounting services to small and medium-sized privately owned companies.
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