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TAXATION

SHAREHOLDER/OWNER REMUNERATION – YEAR-END TAX TIPS (2016)

• There is still sufficient time to determine the optimal salary-dividend mix for the owner-manager and family members (in lower tax brackets) to minimize overall taxes. Consider the following factors in deciding the optimal remuneration:
  • Marginal tax rates
  • Cash flow needs at the personal level
  • Corporation’s tax rate and level of income
  • RRSP contribution limits
  • Available personal tax deductions or credits (child care expenses, donations, etc.)
  • Research and development tax credits

• When paying a salary to family members, ensure the amounts are reasonable and relate to services provided to the business, and paid within 179 days of the corporation’s year-end. Remitting appropriate payroll taxes on time is also crucial.

• When declaring, and paying dividends, consider distributions in the following order:
  • Capital dividends (tax-free)
  • Eligible dividends that trigger a refundable dividend tax on hand (RDTOH) refund
  • Non-eligible dividends that trigger an RDTOH refund
  • Eligible dividends, without an RDTOH refund
  • Non-eligible dividends, without an RDTOH refund

• Capital dividends planning that will allow for tax-free dividends. In many cases, realizing a capital gain in the corporation may not be such a bad thing. Thanks to the capital dividend, the maximum overall combined taxes (owner and company) are 26.6{98da96552ae73051ce8ee64cdd9616063341c6d40a56dbb2750e8843570a9048} in Quebec. Consider managing this potential tax efficient strategy in your remuneration mix.

• Consider establishing a family trust to allow more flexibility in income splitting with family member in lower tax brackets, if not for 2016, most certainly for 2017. For example, the company can pay approximately $35,000 as non-eligible dividends ($50,000 as eligible dividends) to the trust in which distributes the dividends to each adult beneficiary (assuming they have no other income), without triggering any income taxes.

• In deciding the optimal amount, consider maintaining status of the shares of the corporation as qualified small business corporation shares; eligible for an exemption on the capital gain from the sale of such shares. Not distributing sufficient salary or dividends, and keeping the cash in the company may taint that status and consequently disqualify the shares for the exemption.