Minimizing Tax, Deferring Tax and Re-Investing Tax Dollars
Who would you rather have spend your money? Yourself? Or another person? Most people believe that they can spend their money better than anyone else can, so why would you give that money to someone else? There is no such thing as tax avoidance, but there is such thing as a tax-deferral.
The value of a deferral keeps money in your hands longer, to allow you to best utilize the money, and in turn hopefully grow the economy.
With the right tax plan and tax deferral strategy, you'll be left with more of your hard-earned money. Here's what you can do with all those savings:
A Reinvestment in your Business
By leaving money in your business, rather than removing it personally in the form of either a salary or dividend, you are providing the business with additional capital. This additional capital can be used to purchase new assets, hire new staff, or grow into a new area. It is not unreasonable to expect a return on capital in a small business to be upwards of 20%, well above anything that you could get in the market.
For Estate Planning Purposes
One of the benefits of using a corporation (or an investment corporation), is that you can use the money left in the corporation to build your retirement fund, or potentially, the money that you wish to pass onto your Estate. When you are only taxed at the corporate rate, it is much lower than if you were to take this money out personally. Deferring taxes provides additional dollars to grow. For example, assume the corporation is a small business, and pays approximately 10.5% corporately (will vary by province), as opposed to closer to 33% personally. On $100,000, that’s $22,500 that you are able to reinvest. If you take a conservative return of 3%, that’s over $600,000 in additional dollars over 20 years.
For Flexibility in Personal Income
Right now, your business is growing rapidly, and you’re removing money from the corporation to fund your lifestyle. Your current lifestyle may involve things such as paying for a mortgage, car loans, and education for your children - expenses that you may not have in the future. These current expenses require you to have enough personal income that you’re in a higher tax bracket. By only pulling out exactly what you need to fund your lifestyle, and leaving the rest to grow in the corporation, you are providing yourself with the option to access it later in life, when you won’t need as much money to fund your lifestyle. The ability to “smooth” your income will allow you to pull income out at a lower tax rate in the future, assuming that your expenses in life will eventually decrease.
The value of a deferral, depending on your risk portfolio can be substantial. It’s important that your personal income is providing you with the lifestyle that you want, while also looking to the future. As always, talk with your accountant on how deferring your taxes in the corporation, may help to grow your net worth quicker.