Top 10 Financial Planning Concepts for Business Owners: #2 Defer and Decrease Taxes

Milestone Wealth Management Ltd. - May 15, 2024

Business owners have the advantage of being able to defer and/or decrease the total amount of tax they pay.

In the case of an incorporated business, an owner has the opportunity to split income with their spouse and other family members by paying them a salary, provided that they are involved in the business. Similarly, another option is to have the main business owner’s spouse as co-owner, allowing the company to pay dividends to the co-owner spouse if he/she is an active participant in the business. If the owner’s spouse and/or children are in a low tax bracket, getting them involved in the business and receiving compensation is a way to distribute money from the company to the family at a lower overall tax level.

Using company funds to contribute to an RRSP or Spousal RRSP also allows the business owner to take an income from the company, but then defer the personal tax on that income by sheltering it inside of a tax deferred plan. The money only becomes taxable many years later when withdrawn. This can be by the owner in the case of an RRSP, or the owner’s spouse in the case of a Spousal RRSP.

Another option is to withdraw company funds to contribute to the owner’s RESP for a child. In this case, the withdrawal will still be taxed in the hands of the owner personally; however, the contribution to the RESP provides a 20% matching from the government, somewhat offsetting the tax liability. The money can remain growing tax-sheltered inside the RESP until such time that the money is needed for education. At that point, only the growth and grant are taxed in the hands of the child when the money is withdrawn, providing they are in post-secondary school at the time.

As always, we encourage you to reach out to your trusted tax planning professional for information and advice tailored to you and your business.

 

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