Stop throwing your hard-earned money away on taxes. Here are five tips to help reduce your corporate tax bill and pay less tax as a business owner in Canada.
5 Ways to Pay Less Tax in Canada
One of the challenges with building more wealth personally and in your corporation is getting hit with bigger tax bills.
Let’s get into five valuable tax planning tips to pay less tax as a business owner in Canada. These tips can help you grow money in your corporation and get it out tax-free.
1. Use the Capital Dividend Account
The first tool is the Capital Dividend Account. It’s one of the most important and effective tools to grow money inside your corporation and pay less tax.
The Capital Dividend Account can save you millions in tax by allowing life insurance proceeds and the non-taxable portion (50%) of capital gains to flow out of the corporation tax-free.
It’s available to business owners with a Canadian-Controlled Private Corporation.
Here’s how to strategically set up your investments and insurance to take advantage of the Capital Dividend Account.
Invest in Capital Gains Producing Investments
Make sure you’re investing in capital gains investments inside your corporation. These are typically real estate, stocks, and corporate-class mutual funds.
Only capital gains can be withdrawn tax-free from the corporation via the Capital Dividend Account. The growth on interest or dividends investments cannot be allocated to the Capital Dividend Account balance.
Here’s an example: If your corporation earns a $100,000 capital gain from selling a stock, 50% is taxable, and the other 50% is non-taxable. The non-taxable portion becomes a Capital Dividend Account credit. In this case, $50,000 is taxable, and the other $50,000 can come out of the corporation completely tax-free via the Capital Dividend Account.
Own Life Insurance Inside Your Corporation
To ensure tax-free life insurance payouts, you must own the life insurance inside your corporation.
When the corporation is the owner, payer, and beneficiary, your family can access the death benefit tax-free from the Capital Dividend Account.
An additional tax benefit with this is the ability to pay for the premiums with corporate dollars taxed at 11% instead of personal dollars taxed at 54% (tax rates vary by province).
2. Invest in Corporate Class Mutual Funds
Corporate-class mutual funds are a very tax-efficient way to build your investment portfolio. It allows interest income, such as bonds or GICs, to convert into capital gains.
As mentioned before, maximizing capital gains income is best because only 50% is taxed, while interest income is taxed at full.
By investing in corporate-class mutual funds, all your income inside your corporation can grow in a capital gains tax structure.
3. Overfund Your Corporate-Owned Life Insurance
Life insurance is one of the most valuable tax planning tools inside a corporation because you can benefit from tax-deferred growth on your investments.
Overfunding your life insurance policy is a great strategy to maximize its tax-exempt exposure. This can be done through universal life insurance or whole life insurance.
Instead of letting the extra cash in your corporation sit outside these policies, use it to overfund the policy.
Once the money is inside the policy, you have a few options. You can either:
- Access that money today to reinvest in your business by leveraging the policy.
- Borrow some out to spend in retirement.
- Pass it on to the next generation, leaving a legacy for your family completely tax-free.
Watch a video on the strategies above
4. Pay Yourself a Dividend, Not a Salary
One major advantage of being incorporated is the flexibility in how to pay yourself, whether that’s dividends or a salary.
If you pay yourself dividends instead of a salary, you can avoid paying into the Canada Pension Plan (CPP), which leaves extra money in your corporation to invest at your discretion.
CPP is not necessarily bad, but it ultimately comes down to your goals and whether you want to keep control of those dollars or put them in the hands of the government.
Paying yourself dividends gives you control of your retirement planning by investing and growing that money in your corporation how you prefer.
5. Don’t Take Money Out of Your Corporation to Invest
More often than not, it’s best to invest with corporate dollars instead of pulling the money out of your corporation to invest.
Here’s an example: If you earn $100 in your corporation and pay 11% corporate tax, you’re left with $89 to invest. If you take the $100 out of your corporation and pay personal tax at a higher tax bracket, you only have $50 to invest. Even if you put the $50 into a tax-free savings account, you must double that money to get $100. That is a 100% rate of return. If left in your corporation, you only need about a 14% return to break even.
(Have extra cash sitting in your corporation? Here are 4 ways to invest it)
You end up having significantly less money to invest because you must pay personal taxes.
The smarter strategy is to leave this money inside your corporation, make sure to invest in tax-efficient vehicles and maximize growth. Then with innovative strategies, you can get that money out tax-free.
Watch a video on the strategies above
Implement these tips for a lower tax bill today, a lower tax bill in the future, and a larger legacy for your family.
Book a call to create a personalized financial plan using the power of your corporation. Save thousands of dollars with the most advanced financial strategies.
Did you learn a lot about how to pay less tax? Here are three more posts to read next:
- Your Guide to Tax Planning
- How To Use Life Insurance For Retirement
- Holding Company in Canada: Is It Worth Setting One Up?
