CORPORATE
TAXATION
Certain
tax and legal principles for corporations illustrate the advantages
and responsibilities of operating a full-blown corporation. Companies
are legal entities with limited liability; Private corporations
which are majority Canadian-owned and "active" - -
C.C.P.C.s - - get tax reductions and owners may exempt up to
$500,000 of gain on the sale of common shares; There is more flexibility
for income-splitting and deducting expenses with a corporation;
and,· Shareholders are generally paid on only a salary or
dividend basis but taxes may be minimized.
Corporations
are separate legal entities with "limited liability".
Creditors are restricted to seizing corporate assets although major
creditors will frequently require that officers/directors provide
personal guarantees on corporate debt. Otherwise, shareholders,
officers or directors are not personally liable for corporate debts
unless they engage in criminal conduct or are grossly negligent.
Directors may be held liable for unremitted payroll deductions,
GST and PST as these monies are considered to
be trust amounts held for the government. If a director has no knowledge
of non-remittances and is not involved in day-to-day activities,
a 'non-active director' defense may be raised. Insurance protection
should be provided for directors and to protect the value of a successful
corporation.
Active
Canadian-Controlled Private Corporations (CCPCs) - - at
least 50% of the voting shares held by Canadians - - will enjoy
lower tax rates, and provide up to $500,000 tax-free per taxpayer
on the sale of common shares held for 2 years. Corporations are
treated as active when they deal with the public no matter how few
employees there are. A corporation only owning rental-income properties,
to be treated as active, must employ at least five full-time employees
throughout the year (ITA s.s. 125(7) (e)).
The
goal is to minimize taxes getting money out of a corporation. A
dividend/salary threshold determines the optimum balance between
the two types of income for individuals and within families. It
tracks RRSP contributions, CPP contributions and
other income.
Taxable
benefits result if you get a company car or receive interest-free
loans to purchase a home or shares in the corporation. These arrangements
are advantageous.
Corporate
bonuses may be deducted immediately by the corporation and paid
to the recipient within 6 months. This reduces corporate tax and
defers personal taxes.
To
split income, spouses and children may be paid wages as employees
and/or directors. They must be paid on a FMV basis. They
may also receive dividends if they own shares. Dividends from any
Canadian corporation are taxed preferentially since the Dividend
Tax Credit partially offsets corporate taxes paid. A spouse
receiving only Canadian dividends, would pay no personal taxes on
about the first $25,000. Therefore, the only tax is the corporate
tax paid on profits - - 21.5% in year 2000.
For
active CCPCs, the Small Business Deduction (SBD)
in year 2000 reduces combined basic Federal/Ontario taxes from the
full rate of 43.95% to 20.45% (13.12% Federal plus 7.33% Ontario)
on the first $200,000 of taxable income. For 2001 through 2005 the
Ontario government has scheduled changes to both the SBD
tax rates and levels of taxable income subject to the SBD.
The Ontario SBD rate will decrease by ½% per year
from 7% in 2001 to 5% in 2004, and then to 4% in 2005. At the same
time the level of taxable income subject to the Ontario SBD
increases by $40,000 per year from the $200,000 in 2000 to
$400,000 in 2005. (Note that the Ontario changes are effective on
January 1st each year and are pro-rated for fiscal year-end dates
other than December 31st.) The Federal government has not scheduled
any changes in the SBD rates on the first $200,000 of taxable
income, but has introduced a new SBD rate of 22.12% for
taxable income in the range of $200,001 to $300,000. This is really
an interim measure as the Federal full tax rate of 29.12% is scheduled
to decline to 22.12% by 2004 at which point it will match, and thus
eliminate, the new SBD rate in the range of $200,001 to
$300,000. For 2001 the Federal tax rates are: SBD rate
of 13.12% up to $200,000; SBD rate of 22.12% from $200,001
to $300,000; and, 29.12% full rate over $300,000. The combined Federal/Ontario
tax rate for corporations with up to $200,000 taxable income will
be 19.62% in 2001. This combined rate will decrease by ½%
for each of the next 3 years, then a further 1% in 2005. Corporations
with taxable income over $200,000 will have to take into account
the combination of new rates and the different SBD taxable
income limits set by the Federal and Ontario governments.
Under
the "Rule of Association", the SBD must
be apportioned among "associated corporations" where there
is common ownership. The test is "control" and Revenue
Canada will decide the degree of ownership that gives de facto
control. Check share ownership of investors. Spouses owning different
corporations will be treated as associated.
Common
shares of active CCPCs qualify, on sale, for a capital
gains exemption of up to $500,000 per taxpayer under the Lifetime
Capital Gains Exemption. Make shares more `saleable' by: adding
employees to increase revenues and to provide continuity; selling
shares tax-free to employees to give them equity; and, using corporate
after-tax dollars to build up 'hard' assets. You can buy your primary
place of business which gives you the added advantage of reducing
overhead.
Corporations
must file Federal (T2) and Ontario (CT23) tax
returns within six months of the year-end and are required to use
the accrual basis for accounting purposes.
Business
Numbers (BN) replaced GST numbers in 1996 and are
used for GST and payroll remittances and for personal and
corporate taxes. If annual revenues are under $30,000, you must
still complete the BN application to exempt yourself from
charging and remitting GST.
You
must use the accrual method that reports income if invoiced in the
fiscal period - - use closing dates - - and deducts expenses incurred
in the period.
GST
& Recordkeeping
When
you apply for a Business Number, declaring annual GROSS
revenues under $500,000 will result in your being assigned an annual
filing period based on the calendar year. Quarterly filers must
finish the year then elect onto an annual filing for the beginning
of the next year. Note: If you are an annual filer and your total
remittance to GST was greater than $1,500 in the previous
year, you must submit quarterly GST installments equal
to 1/4 of the total GST remitted in the prior year. GST
is simply an extra 7% pool of cash you receive and must account
for.
1.
Detailed GST Method. Those with revenues of more than $500,000
must use this method. It requires a lot of work with every revenue
and expense item entered with the amount and GST and PST
components separated.
2.
Quick GST Method. To use this method, your revenues plus
GST are bundled together and must not exceed $200,000.
For the quick method, remit 4% of the first $30,000 of revenues
plus GST, and 5% on the amount over $30,000. So, $1,200
on the first $30,000, then 5% of the excess. Reduce the amount payable
or increase a GST refund by claiming the GST paid
for capital purchases. You can elect to use the Quick Method
by filing the proper election form within the first 90 days of a
fiscal year but you must use the method for at least one full year.
The Quick Method benefits corporations where GST-subject
expenditures are less than about 29% of revenues excluding GST,
and benefits mainly corporations with revenues in the range of $100,000
to $200,000. You must factor out GST from revenues and
expenses even if using the Quick Method.
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