FIVE TIPS TO HELP BUSINESS OWNERS SAVE TAXES AND CREATE A LOT OF PHILANTHROPY
Mark Halpern (the CEO of WEALTHinsurance.com®) has a lot of respect for fellow business owners who have worked hard to build their firms into successful enterprises. Despite all the adversity along the way, they managed to survive recessions, business downturns, sky-high interest rates, stock market meltdowns, stifling taxation, and more recently a global pandemic.
Creating and growing a business keeps roughly 1.1 million Canadian business owners going. Their determination continues to pay off, providing their families with a home, financing their lifestyle and perhaps a recreational property and well-deserved vacations. Business owners do enjoy some unique money-saving opportunities that are not available to other taxpayers.
Here are some cost-effective tips to preserve your wealth, pass it on to family tax effectively and create a meaningful charitable legacy too.
- Preserving Your Wealth: Being successful allows you to transition from success to significance. With proper planning you can become a philanthropist and create a charitable legacy that will inspire your children and grandchildren, as well as other like-minded individuals to follow your example.
A business owner now enjoys an indexed $883,384 lifetime capital gains exemption. Since only half of any capital gain is taxable in Canada, the actual dollar value of the exemption will be a little over $441,000. Obtaining the maximum benefit of the exemption is something the business owner need start planning for 3 to 5 years before they exit the business.
Proper planning now can prepare an estate to pay the ‘final tax bill ’after one’s death. Without planning, a family may face a financial mess, and be forced to sell some of their assets, including the business, to come up with funds to pay the tax bill.
- Great Value in Life Insurance Products: One of the most cost-effective ways to fund liabilities like your tax bill is to use life insurance products. For literally pennies on the dollar, you can mitigate your final tax bill and still provide an inheritance to your family. In addition, you can use ‘corporate’ dollars vs. personal, after-tax dollars, to acquire your life insurance. If you own private company shares, several benefits unavailable to other taxpayers are open to you. Your overall estate plan may not include having a charity own part of your business, though once you understand the ‘why and how’, you may embrace the strategy.
- Income Reduction as Tax Advantage: You can make better use of your donation tax credits and reduce income tax payable by your estate by instructing your executors to designate your estate as a graduated rate estate (GRE). This allows them to claim donations of as much as 100 per cent of net income in your final tax return with a one-year carry back.
- Do it now while the sun shines: Planning while the sun is shining is incredibly important, otherwise you could miss out on a great opportunity. For example, a woman in her 50’s whose parents, 90 and 85, personally own a portfolio of commercial real estate worth $50 million but are too old and unhealthy to qualify for life insurance. The family could have used inexpensive life insurance, at a cost of pennies per dollar, to pay the roughly $13.4 million tax liability that will be due when the parents die.
- Philanthropy is a wonderful way to reduce or eliminate your tax exposure. Donating some of your private company shares to a favourite charity can save you millions in taxes for thousands of dollars.
The current pandemic should have convinced most people of the need to plan. Tax increases are expected because governments at every level are spending billions to help Canadians deal with health issues and financial challenges. Who will pay for that?
Governments will want to collect higher taxes from all successful Canadians. Income tax rates may rise further – already 54 per cent in Ontario - and capital gains taxes may increase from the current 50 per cent to 75 per cent. A new wealth tax is anticipated.