As your business grows and you have significantly more wealth personally and in your corporation, one of the challenges you will face is trying to pay less taxes. Fortunately, there are several ways that the government of Canada allows business owners to reduce their taxes.
Here are our top 3 tips to help you pay less tax as a business owner:
1. Pay yourself a dividend, not a salary
If you pay yourself a dividend instead of a salary, then you can avoid paying into the Canada Pension Plan. Every year this leaves you with an additional $5,800 in your corporation to invest at your discretion. If you put that money into the Canada Pension Plan, you don’t have access to it and are no longer are able to use that money in your business.
2. Don’t take money out of your corporation to invest
Consider this example: If you earn $100 in your corporation and pay 11% 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 it your $50 into a tax-free savings account, you must double that money to get back to a hundred dollars. That would be a 100% rate of return.
In your corporation, with the $89, you only have to have about a 14% return to get back to even.
3. Own your life insurance inside your corporation
If you own your life insurance inside your corporation, you’re purchasing that insurance with dollars that have been taxed at 11%, instead of dollars that have been taxed at 50%. So again if your corporation earns $100 for example, you’re left with $89 (after taxes) to purchase life insurance. Now compare this to earning that same $100 as an individual, you would be left with $50 (after taxes) to buy life insurance.
So own your life insurance inside the corporation, but always make sure that the corporation is the owner, the payer, and the beneficiary to make sure you maximize those tax benefits.
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If you want to learn more about how to pay fewer taxes as a business owner and how we are reinventing the financial industry in Canada, book a call and we’d be love to run you through our full financial Blueprint process.