Protecting Your Money - Answering Three Burning Questions About Taxes

Whether or not the tax system is fair doesn't matter. What does matter is that once you know how to navigate it, you'll be more profitable.

The reality is that there are many things about the tax system that confuse business owners. 

After all, some industries have slightly different taxation brackets, and various actions are subjected to specific taxes. Even some actions that seem as easy as filing a tax return can feel overly complex if you don't learn about the system.

Now, I know that some questions related to taxes are more popular than others.

That's why in this article, I'll answer three of the most burning questions that business owners, entrepreneurs, and individuals ask all the time.

The 3 Questions

Question #1. When Do You File for a Family Trust?

Usually, this is something that your accountant or bookkeeper can do for you. But if you're not using one, you should know that the filing deadline is March 31. 

There are two filings to keep in mind here – filings for individuals and the overall trust structure.

So, let me explain how the family trust works.

If you have a family trust that owns investments or shares in your private corporation, you issue dividends to that trust. Alternatively, the trust can have an investment income that comes in on a calendar year basis.

What's important here is that the income earned inside the family trust be allocated to the beneficiaries during that calendar year. Thus, you have to determine how much income is being distributed out of the family trust and how much is going to each beneficiary.

The filing deadline for those individual allocations, also known as T3 slips, is still March 31.

Question #2. When Do You File for Corporate Tax Purposes?

One of the biggest mistakes you can make as a business owner is not filing your corporate taxes on time. The longer it takes you to file, the higher the penalties you can end up paying.

So, if you're really trying to work the tax system to minimize your liabilities, make sure you do this on time.

As for the actual date, it can differ. But you must file your corporate taxes within six months of the year-end date of your business.

Let’s say your business year-end date is on December 31. This means you'd have to take care of your corporate filings by June 30 of the following year.

But here's the vital part: 

Filing and payments have different deadlines. And it's crucial to know this to avoid penalties.

Let's take the same business year-end date on December 31. That means you must file your taxes by June 30. However, you will need to make payments within 90 days of your year-end date.

Therefore, if you have outstanding payments, you should pay them by March 31.

It's a counterintuitive system that can get you in a lot of trouble if you're not up to date with how the tax system works.

However, there's a reason behind the madness:

With this system, it makes sense for businesses to set up a monthly recurring corporate tax installment payment plan.

Ideally, the government gets its money quicker. And by the time you reach March 31, you'd likely have no outstanding balance.

Do these things right, and you won't have to worry about penalties or interest.

Question #3. What Tax Do I Pay for Selling My Business?

Granted, you might not be anywhere near selling your business just yet. But let's face it - every business owner has an exit plan.

While it's nice to think about potential valuations, income multiples, and profits, one question remains:

What's the tax on selling a business?

Well, it depends on how you're structuring the sale.

Know that you have two ways to sell a business, each one with its own tax implications.

One method is to sell assets inside your business

Now, assets can be anything, including land, equipment, goodwill, etc. And in this scenario, you have to pay capital gains tax. However, this is only half the regular tax, which means you only pay 25%. That leaves 75% of the capital gains free for distribution.

But there's a better way to get an exit from your business:

Selling shares in your company.

It’s because selling a Canadian-controlled private corporation's shares would qualify you for a capital gains exemption. This means that up to $850,000 of the capital gain on the sale wouldn't be taxable to you, which is great for small business owners.

Of course, anything not included in the capital gains exemption or comes above that value would imply a 25% capital gains tax.

It’s worth mentioning that the only thing that's tricky with this exit structure is that the seller usually reaps most of the benefits.

Let me explain.

Buying a business through assets allows buyers to benefit from a tax shield. 

The assets they get would be classified as depreciable, which means they can get tax value related to them. A buyer can then depreciate the assets between 5% and 30% every year for the tax shield. 

This doesn't apply when buying shares.

So it's essential to understand both structures before working out an exit strategy or going into negotiations. Of course, your goal as a buyer would be to get a deal that enables you to sell your business through shares to get the capital gains exemption.

Don't Let Taxes Get the Better of You

If you make sales and have good margins, your profits are guaranteed, right? 

Not exactly.

One of the biggest profit killers is the tax system. Almost everything you make in your business can be taxable in one way or another if you don't know how to protect yourself.

While the tax system might seem ruthless, it offers enough leeway for everyone to emerge as a winner from the exchange.

Even something as simple as filing taxes on time can greatly impact your financial situation. Particularly if it saves you from paying penalties and interest on outstanding balances.

The same goes for picking the right exit strategy from your business. So, ensure you go home with a higher profit instead of letting the government take away a big chunk of your hard-earned money.

You may not completely avoid paying taxes, but you can ease the burden a bit.

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