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Taming The Tax Beast : Partnering for Financial Success

Taming The Tax Beast : Partnering for Financial Success. Case Study Facts. Mr. A owns 100% of ABC Company Inc. which he bought in 1996 for $500,000 (at the time the business was grossing $5M and earning $100K net profit)

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Taming The Tax Beast : Partnering for Financial Success

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  1. Taming TheTaxBeast:Partnering for Financial Success

  2. Case Study Facts • Mr. A owns 100% of ABC Company Inc. which he bought in 1996 for $500,000 (at the time the business was grossing $5M and earning $100K net profit) • ABC has grown and now has revenue of $12.5M and pre-tax profit of $500K after salary of $300K to Mr. A • ABC has Retained Earnings of $1M • Mr. A believes that ABC is worth $2M today (after retained earnings are drawn out)

  3. Case Study Facts, continued • Mrs. A left the workforce years ago (but receives a $50,000 salary from ABC) • The A’s have 4 children: 21, 19, 17 and 14 • The 21 and 19 year old children both attend university out of town • Mr. A wants out in 5 years and wants to sell ABC for at least $6M cash

  4. Capital Gains Exemption $750,000 Enhanced Capital Gains Exemption • Shares of Qualifying Small Business Corporation (“QSBC”) • Accessing multiple exemption amounts • Additional family owners • Potential savings of $174,000 per shareholder on future sale of shares of company

  5. How much tax does he owe? POD $6M ACB ($500K) CGE ($750K) $4,750K CG $2,375K TCG Tax $1,100K

  6. How much tax COULD he owe? POD $6M $2M $4M ACB ($500K) ($500K) - CGE ($750K) ($750K) ($3,750K) $4,750K $750K $250K CG $2,375K $375K $125K TCG Tax $1,100K $170K $60K $230K $870K savings

  7. Reality Check… What if ABC’s profit drops to $150K? Are you overpaying corporate and personal tax? • Small business deduction utilization • Income splitting using a Family Trust • Are you getting low corporate tax rate money out of your company at little or no personal tax cost? • Multiplication of capital gains exemption on a sale of shares

  8. Total Tax Bill - Currently Total Net after tax = $216,250Total tax and CPP payable = $157,000

  9. What’s Wrong With This Picture? • Not utilizing full Small Business Deduction • 15.5% corporate tax on up to $500,000 corporate income • Overpaying total corporate and personal tax…but by how much?

  10. Total Tax Bill – Remuneration Strategy #1 Total Net after tax = $216,250 (same as current situation)Total tax and CPP payable strategy #1 = $126,250 Total tax savings = $30,750($157,000 - $126,250)

  11. Total Tax Bill – Remuneration Strategy #2 …with corporate restructuring: Total Net after tax = $216,250 (same as current situation)Total tax payable strategy #2 = $88,250 Total tax savings = $68,750($157,000 - $88,250)

  12. For more information… Mitch Silverstein, CPA, CA – Partner msilverstein@richter.ca 416.488.2345 x 274 Richter LLP2345 Yonge St., 3rd FloorToronto, ON M4P 2E5www.richter.ca

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