Tax Planning

Question 1

Employer provided automobile –
Tax planning

Answer 1

• Consider employee purchasing the car and charging a reasonable per-km allowance (may be more tax effective since the standby charge is based on original cost)
• Consider employee including allowance in income and claiming business portion of actual car expenses if they exceed the allowance
• Consider sale and leaseback for employer-provided cars (leasing may lower tax benefits because otherwise the standby charge is based on original cost)
• Maintain log to justify business vs. personal km
• Lower standby charge by reducing number of days vehicle available for personal use
• Increase business use by visiting clients on the way to and from work

Question 2

Tax considerations regarding dividend

Answer 2

Dividend
- Not deductible to the corporation
- Subject to a gross up and a dividend tax credit when taxed personally
- Generally, attracts less tax at the personal level than salary
- Does not increase earned income for purposes of RRSP contribution room or childcare deductions

Question 3

Tax considerations regarding salary

Answer 3

Salary
- Would result in a deduction for the corporation
- Would be taxed personally using the progressive tax brackets
- Will require payments (employee and employer portions) into the CPP program which will cost a maximum of around $5,500 per year, depending on the salary, shared between you and Jump. However, you will receive payments from the CPP program later in life when you retire
- Would increase your earned income and therefore your RRSP contribution room. This will allow you to put funds aside for your retirement and receive a tax deduction in the year of contribution. Funds invested in the RRSP will compound tax-free while in the plan. You will only be taxed on the original contribution and the investment income in the year od withdrawal as other income
- Would also create earned income for childcare deduction purposes. If you have children and meet the other criteria for deducting childcare costs, being paid a salary will allow you to deduct childcare costs whereas being paid a dividend will not allow you the same deduction

Question 4

Tax considerations regarding retaining money in the corporation

Answer 4

• Would result in a tax deferral, as income would be taxed at the corporate rate which is lower than your personal rate
• The interest and capital gain income earned from passive investments will be considered property income, which may be subject to ART, creating an RDTOH balance. In that case, paying a dividend in order for the company to receive a dividend refund would be beneficial
• Would be taxed when removed from the corporation

Question 5

Tax planning salary vs dividend

Answer 5

You would pay yourself an annual salary large enough to qualify for the maximum CPP benefit when you retire, or a salary large enough to maximize the RRSP room, and then take any excess requirements for personal funds in the form of dividends or leave the remainder in the company until you retire.
As mentioned above, the combination that creates the least net tax depends on numerous factors and I would need more information to provide more specific guidance.