BMO Bank of Montreal

BMO Bank of Montreal

April 18, 2011 09:00 ET

REPEAT: As Tax Deadline Looms, BMO Report Shows Only 50 Per Cent of Business Owners Contributed to an RRSP

With the tax deadline fast approaching, entrepreneurs can still look at tax-saving strategies

- 62 per cent of small business owners plan to use RRSPs as part of their retirement strategy, while 51 per cent look to the sale of their business to fund their retirement

- BMO offers tax tips for small business owners ahead of the April 30th deadline

TORONTO, ONTARIO--(Marketwire - April 15, 2011) - If you are one of the many small business owners that did not contribute to a Registered Retirement Savings Plan (RRSP) you still have time to put other tax saving strategies in place before the tax deadline of April 30th.

BMO Bank of Montreal today released the results of a survey indicating approximately five in ten Canadian business owners made a contribution or were planning to contribute to their RRSP for 2010.

"For entrepreneurs who didn't contribute to their RRSP, there are still a number of tax-planning opportunities that can significantly help small business owners to achieve tax-efficient long-term savings," said Cathy Pin, Commercial Banking, BMO Bank of Montreal. "Business owners can work with a tax expert to take advantage of the various tax-saving strategies available to them."

The survey of small business owners, conducted by Leger Marketing, also found:

  • Entrepreneurs that run a business with 10 or more employees, and who believe their company will grow this year, are more likely to contribute to an RRSP (62 per cent versus 54 per cent).
  • Business owners in Ontario are more likely than those in BC and Quebec to say that they plan on using the sale of their business to fund their retirement (60 per cent versus 36 per cent and 43 per cent respectively).

"One key factor for entrepreneurs to consider is the potential cash flow benefits that can come from incorporating the business," said John Bathurst, Vice-President, Wealth Services, BMO Harris Private Banking. "Incorporated businesses can use the benefits of a low small business tax rate – which is much lower compared to a high bracket tax rate – to put the difference towards savings or use it to pay down business-related debt," added Bathurst.

Tax strategies for long-term savings include:

Income Tax Reductions

By incorporating their business, entrepreneurs will enable their business income to qualify for the small business tax reduction. This can reduce the combined corporate tax rate on the first $500,000 of active business income to as low as 12 per cent.

The reduction may be available if your company qualifies as a Canada Controlled Private Corporation (CCPC), carrying on an active business in Canada.

Exemptions for capital gains

Generally one of an entrepreneur's most significant assets is their ownership of small business shares. When it is time to retire and the owner wishes to sell the business, he/she can qualify for a lifetime capital gains exemption of up to $750,000. Appropriate planning should be done with a tax professional to ensure that the entrepreneur has access to this benefit; some complex rules apply, including that the claimant must have owned the shares for at least two years before selling.

Remuneration options

Small business owners who have incorporated their business have greater flexibility in determining how to be compensated, such as choosing to pay themselves a salary, or a dividend, or both.

For example, a reasonable salary can create personal RRSP room, provide a deduction for the business, and help bring business taxable income below the $500,000 small business deduction limit. On the other hand, if the business income in excess of $500,000 is retained in the company, it is taxed at a lower rate than would be paid on the salary or bonus paid to the owner. The corporate after-tax income may be paid as a dividend and may be taxed at an overall tax rate lower than a salary or bonus. A dividend is not tax deductible for business tax purposes.

Income splitting

Family-run businesses can capitalize on income-splitting by hiring a spouse or children on the payroll, since a reasonable salary is deductible to the business. They pay the tax themselves, and if they pay at a lower rate, there could be tax savings for the family.

Ensure their pay is reasonable, their roles in the company are clearly defined, their performance is well documented and the amount paid is not a redistribution of income from the entrepreneur. It must be truly paid for services rendered to the business.

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