january, 2013 taming the tax beast: partnering for financial success
TRANSCRIPT
January, 2013
Taming TheTax Beast:Partnering for Financial Success
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• Mr. A owns 100% of ABC Company Inc. which he bought in 1996 for $500,000 (at the time the business was grossing $5M and earning $100K net profit)
• ABC has grown and now has revenue of $12.5M and pre-tax profit of $500K after salary of $300K to Mr. A
• ABC has Retained Earnings of $1M
• Mr. A believes that ABC is worth $2M today (after retained earnings are drawn out)
2
Case Study Facts
47
• Mrs. A left the workforce years ago (but receives a $50,000 salary from ABC)
• The A’s have 4 children: 21, 19, 17 and 14
• The 21 and 19 year old children both attend university out of town
• Mr. A wants out in 5 years and wants to sell ABC for at least $6M cash
3
Case Study Facts, continued
47
$750,000 Enhanced Capital Gains Exemption
• Shares of Qualifying Small Business Corporation (“QSBC”)
• Accessing multiple exemption amounts
• Additional family owners
• Potential savings of $174,000 per shareholder on future sale of shares of company
4
Capital Gains Exemption
47
5
How much tax does he owe?
POD
ACB
CGE
CG
TCG
Tax
$6M
($500K)
($750K)
$4,750K
$2,375K
$1,100K
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6
How much tax COULD he owe?
POD
ACB
CGE
CG
TCG
Tax
$2M
($500K)
($750K)
$750K
$375K
$170K
$4M
-
($3,750K)
$250K
$125K
$60K
$230K
$6M
($500K)
($750K)
$4,750K
$2,375K
$1,100K
$870K savings
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What if ABC’s profit drops to $150K? Are you overpaying corporate and personal tax?
• Small business deduction utilization
• Income splitting using a Family Trust
• Are you getting low corporate tax rate money out of your company at little or no personal tax cost?
• Multiplication of capital gains exemption on a sale of shares
7
Reality Check…
47
• Corporate: $150,000 at 15.5% = $23,250
• Personal:
Mr. A Tax on $300,000 salary = $120,000CPP $2,200
Mrs. A Tax on $50,000 salary = $9,350CPP $2,200
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Total Tax Bill - Currently
Total Net after tax = $216,250Total tax and CPP payable = $157,000
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• Not utilizing full Small Business Deduction
– 15.5% corporate tax on up to $500,000 corporate income
• Overpaying total corporate and personal tax…but by how much?
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What’s Wrong With This Picture?
47
• Corporate: $500,000 at 15.5% = $77,500
• Personal:
Mr. A Tax on $132,500 dividends = $24,375
Mrs. A Tax on $132,500 dividends = $24,375
10
Total Tax Bill – Remuneration Strategy #1
Total Net after tax = $216,250 (same as current situation)Total tax and CPP payable strategy #1 = $126,250
Total tax savings = $30,750 ($157,000 - $126,250)
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• Corporate: $500,000 at 15.5% = $77,500
• Personal:
Mr. A Tax on $53,500 dividends = $3,075
Mrs. A Tax on $53,500 dividends = $3,075
Kid A (21) Tax on $60,000 dividends = $2,300
Kid B (19) Tax on $60,000 dividends = 2,300
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Total Tax Bill – Remuneration Strategy #2
Total Net after tax = $216,250 (same as current situation)Total tax payable strategy #2 = $88,250
Total tax savings = $68,750 ($157,000 - $88,250)
…with corporate restructuring:
Richter LLP2345 Yonge St., 3rd FloorToronto, ON M4P 2E5www.richter.ca
For more information…
Mitch Silverstein, CPA, CA – [email protected]
416.488.2345 x 274