RRSP Tax Savings Calculator for the 2019 Tax Year

RRSP Tax Savings Calculator

RRSP Deadline: March 2, 2020

This is the deadline for contributing to your Registered Retirement Savings Plan (RRSP) for the 2019 tax filing year. You generally have 60 days within the new calendar year to make RRSP contributions that can be applied to lowering your taxes for the previous year.

If you want to see how much tax you can save, enter your details below!

Please don’t hesitate to contact us on how we can help you achieve your retirement dreams.

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Business Owners: 2019 Tax Planning Tips for the End of the Year

Now that we are nearing year end, it’s a great time to review your business finances. With the federal election over and no major business tax changes for this year, 2019 is a good year to make sure you are effectively tax planning. Please keep in mind that your business may be affected by the recent tax on split income (TOSI) and the passive investment income rules given they came into effect in 2018. These rules can be complicated, please don’t hesitate to consult us and your accountant to determine how this can affect your business finances.

We are also assuming that your corporate year end is December 31, however if it’s not, this is useful when your business year end comes up.

Below, we have listed some of the key areas to consider and provided you with some useful guidelines to make sure that you cover all of the essentials. We have divided our tax planning tips into 4 sections:

  1. Tax checklist

  2. Remuneration

  3. Business tax

  4. Estate

1) Business Year-End Tax Checklist

Remuneration

 ☐ Salary/Dividend mix

 ☐ Accruing your salary/bonus

 ☐ Stock option plan

 ☐ Tax-free amounts

 ☐ Paying family members

Business Tax

 ☐ Claiming the small business deduction

 ☐ Shareholder loans

 ☐ Passive investment income: eligible/ineligible dividends

 ☐ Corporate reorganization

Estate

 ☐ Will review

 ☐ Succession plan

 ☐ Lifetime capital gains exemption

2) Remuneration

What’s your salary/dividend mix?

Individuals who own incorporated businesses can elect to receive their income as either salary or as dividends. Your choice will depend on your own situation consider the following factors:

  • Your current and future cash flow needs

  • Your personal income level

  • The corporation’s income level

  • TOSI rules

  • Passive investment income rules

Please also consider the difference between salary and dividends:

Salary

✓ Provides RRSP contribution

✓ Reduces corporate tax bill

• Payroll tax

• Canada Pension Plan (CPP) contribution

• Employment Insurance contribution

Dividend

• Doesn’t provide RRSP contribution

• Doesn’t reduce corporate tax bill

• No tax withholdings

• No Canada Pension Plan contribution

• No Employment Insurance contribution

✓ Receive up to $50,000 of ineligible dividends at a low tax rate depending on province

As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make. For 2019, salaries of $151,278 will provide the maximum RRSP room of $27,230 for 2020.

Is it worth accruing your salary or bonus this year?

You could consider accruing your salary and / or bonus in the current year but delaying payment of it until the following year. If your company’s year-end is December 31, your corporation will benefit from a deduction for the year 2019 and the source deductions are not required to be remitted until actual salary or bonus payment in 2020.

Stock Option Plan

If your compensation includes stock options, please check if you will be affected by the new proposed stock option rules. This caps the amount of certain employee stock options eligible for the stock option deduction at $200,000 after December 31, 2019. The rules will not affect you if your stock options are granted by a Canadian controlled private corporation.

Tax Free Amounts

If you own your corporation, pay tax-free amounts if you can. Here are some ways to do so:

  • Pay yourself rent if the company occupies space in your home.

  • Pay yourself capital dividends if your company has a balance in its capital dividend account.

  • Return “paid-up capital” that you have invested in your company

Do you employ members of your family?

Employing and paying salary to family members who undertake work for your incorporated business is worth considering as you could receive a tax deduction against the salary that you pay them, providing that said salary is “reasonable” in relation to the work done. In 2019, the individual can earn up to $12,069 and pay no federal tax. This also provides the individual with RRSP contribution room, CPP and allow for child-care deductions. Bear in mind additional costs that are incurred when employing someone, such as payroll taxes and contributions to CPP.

3) Business Tax

Claiming the Small Business Deduction

Are you able to claim a small business deduction? The federal small business tax rate decreased from 9% in 2019 (from 10% in 2018) and not anticipated to increase in 2020. From a provincial level, there will be changes in the following provinces:

Small Business Tax Rate

Therefore, a small business deduction in 2019 is worth more than in 2020 for these provinces.

Should you repay any shareholder loans?

Loaning funds from your corporation at a low or zero interest rate means that you are considered to have benefited from a taxable benefit at the CRA’s 2% interest rate, less actual interest that you pay during the year or thirty days after it. You need to include the loan in your income tax return, unless it is repaid within one year after the end of your corporation’s taxation year.

For example, if your company has a December 31st year-end and it loaned you funds on November 1, 2019, you must repay the loan by December 31, 2020, otherwise you will need to include the loan as taxable income in your 2019 personal tax return.

Passive investment income

If your corporation has a December year- end, then 2019 will be the first taxation year that the new passive investment income rules may apply to your company.

New measures were introduced in the 2018 federal budget relating to private businesses which also earn passive investment income in a corporation that also operates an active business.

There are two key parts to this, as follows:

  • Limiting access to dividend refunds. Essentially, a private company will be required to pay ineligible dividends in order to receive dividend refunds on some taxes which, in the past, could have been refunded when an eligible dividend was paid.

  • Limiting the small business deduction. This means that, for the companies mentioned above, the small business deduction can be reduced at a rate of $5 for every $1 over between $50,000 and $150,000 of investment income, or eliminated if investment income exceeds $150,000. Please note that Ontario and New Brunswick have indicated that they will not follow the federal rules.

If your corporation earns both active business and passive investment income, you should contact us and your accountant directly to determine if there are any planning opportunities to minimize the impact of the new passive investment income rules.

Think about when to pay dividends and dividend type

When choosing to pay dividends in 2019 or 2020, you should consider the following:

  • Difference between the yearly tax rate

  • Impact of tax on split income

  • Impact of passive investment income rules

With the exception of 2 provinces, Quebec and Ontario, the combined top marginal tax rates will not be changing from 2019 to 2020 on a provincial level. Therefore, it will not make a difference if you choose to pay in 2019 or 2020.

Combined Marginal Tax Rate

In Quebec and Ontario, because there are slight increases in the combined marginal tax rate, there are potential tax savings available if you choose to pay dividends in 2019 rather than in 2020.

When deciding to pay a dividend, you will need to decide to pay out eligible or ineligible dividends, you should consider the following:

  • Dividend refund claim limits: Eligible refundable dividend tax on hand (ERDTOH) vs Ineligible Refundable dividend tax on hand (NRDTOH)

  • Personal marginal tax rate of eligible vs. ineligible dividends

Given the passive investment income rules, typically, it makes sense to pay eligible dividends to deplete the ERDTOH balance before paying ineligible dividends. (Please note that ineligible dividends can also trigger a refund from the ERDTOH account.)

Eligible dividends are taxed at a lower personal tax rate than ineligible dividends (based on top combined marginal tax rate). However, keep in mind, when ineligible dividends are paid out, they are subject to the small business deduction, therefore the dividend gross-up is 15% while eligible dividends that are subject to the general corporate tax rate have a dividend gross-up is 38%. It’s important to talk to a professional to determine what makes the most sense when determining the type of dividend to pay out of your corporation.

Combined Personal Top Marginal Tax Rate on Dividends

Corporate Federal Tax Rate and Gross-up factor

Corporate Reorganization

It might be time to revisit your corporate structure given the changes to private corporation rules on income splitting and passive investment income to provide more control on the distribution of dividend income. Another reason to reassess your structure is to segregate investment assets from your operating company for asset protection. (Keep in mind you don’t want to trigger TOSI, so make sure you structure this properly.) If you are considering succession planning, this is the time to evaluate your corporate structure as well.

4) Estate

Ensure your will is up to date

In particular, if your estate plan includes an intention for your family members to inherit your business, ensure that this plan is tax effective following new tax legislation from January 1, 2016. In addition, review your will to make sure that any private company shares that you intend to leave won’t be affected by the new TOSI rules.

Succession plan

Consider a succession plan to ensure your business is transferred to your children, key employees or outside party in a tax efficient manner.

Lifetime Capital Gains Exemption

If you sell your qualified small business corporation shares, you can qualify for the lifetime capital gains exemption (In 2019, the exemption is $866, 912) where the gain is completely exempt from tax. The exemption is a lifetime cumulative exemption; therefore, you don’t have to claim the entire amount at once.

The issues we discussed above can be complex. Contact us and your accountant if you have any questions, we can help.

Succession Planning for Business Owners

Succession Planning for Business Owners

Business owners deal with a unique set of challenges. One of these challenges includes succession planning. A succession plan is the process of the transfer of ownership, management and interest of a business. When should a business owner have a succession plan? A succession plan is required through the survival, growth and maturity stage of a business. All business owners, partners and shareholders should have a plan in place during these business stages.

We created this infographic checklist to be used as a guideline highlighting main points to be addressed when starting to succession plan.

Needs:

  • Determine your objectives- what do you want? For you, your family and your business. (Business’ financial needs)

  • What are your shares of the business worth? (Business value)

  • What are your personal financial needs- ongoing income needs, need for capital (ex. pay off debts, capital gains, equitable estate etc.)

There are 2 sets of events that can trigger a succession plan: controllable and uncontrollable.

Controllable events

Sale: Who do you sell the business to?

  • Family member

  • Manager/Employees

  • Outside Party

  • There are advantages and disadvantages for each- it’s important to examine all channels.

Retirement: When do you want to retire?

  • What are the financial and psychological needs of the business owner?

  • Is there enough? Is there a need for capital to provide for retirement income, redeem or freeze shares?

  • Does this fit into personal/retirement plan? Check tax, timing, corporate structures, finances and family dynamics. (if applicable)

Uncontrollable Events

Divorce: A disgruntled spouse can obtain a significant interest in the business.

  • What portion of business shares are held by the spouse?

  • Will the divorced spouse consider selling their shares?

  • What if the divorced spouse continues to hold interest in the business without understanding or contributing to the business?

  • If you have other partners/shareholders- would they consider working with your divorced spouse?

Illness/Disability: If you were disabled or critically ill, would your business survive?

  • Determine your ongoing income needs for you, your spouse and family. Is there enough? If there is a shortfall, is there an insurance or savings program in place to make up for the shortfall amount?

  • Will the ownership interest be retained, liquidated or sold?

  • How will the business be affected? Does the business need capital to continue operating or hire a consultant or executive? Will debts be recalled? Does the business have a savings or insurance program in place to address this?

Death: In the case of your premature death, what would happen to your business?

  • Determine your ongoing income needs for your dependents. Is there enough? If there is a shortfall, is there an insurance or savings program in place to make up for the shortfall amount?

  • Will the ownership interest be retained, liquidated or sold by your estate? Does your will address this? Is your will consistent with your wishes? What about taxes?

  • How will the business be affected? Does the business need capital to continue operating or hire a consultant or executive? Will debts be recalled? How will this affect your employees? Does the business have a savings or insurance program in place to address this?

Execution: It’s good to go through this with but you need to get a succession plan done.  Besides having a succession plan, make sure you have an estate plan and buy-sell/shareholders’ agreement.

Because a succession plan is complex, we suggest that a business owner has a professional team to help. The team should include:

  • Financial Planner/Advisor (CFP)

  • Succession Planning Specialist

  • Insurance Specialist

  • Lawyer

  • Accountant/Tax Specialist

  • Chartered Life Underwriter (CLU)

Next steps…

  • Contact us about helping you get your succession planning in order so you can gain peace of mind that your business is taken care of.

When and Why You Should Conduct an Insurance Audit

As our lives grow and change with variable circumstances, new additions, and job transitions, our needs for insurance will also evolve. Additionally, economic fluctuations and external circumstances that influence your insurance policy will need frequent re-evaluation to ensure that you are making the most appropriate and financially favorable decisions. Perhaps you aren’t sure whether you should conduct an insurance audit or not. The following scenarios are usually a good indication that you should thoroughly assess and review your current policy contract: 

  • Bringing new life into your family? A new baby may not only prompt you to adjust your beneficiary information, but it is likely to change or influence your coverage needs.

  • Changing jobs? Probationary periods may not provide the same level of disability or accident insurance.

  • Is your policy nearing the end of its term? Be sure to compare prices for new policies as they can sometimes be more affordable as compared to renewing the current plan.

  • Has your marital status changed? Your insurance policy will likely need updating to reflect such.

The specific type of insurance policy you carry as well as personal details certainly influence coverage and premium prices, so if any of the following factors apply to you, be sure to update your policy accordingly. You might be eligible for a rate reduction. 

  • Changes to your overall risk assessment like smoking cessation, dangerous hobbies, high risk profession etc.

  • If you have experienced improvements to a previously diagnosed health condition.

  • Do your policy’s investment options still fall in line with current market conditions?

  • Have you used your insurance policy as collateral for a loan? Once that loan is paid off, collateral status should be taken off the policy.

Insurance policies generated for business purposes should also be regularly reviewed to make sure the policy still offers adequate coverage to meet the needs of the company and includes the appropriate beneficiary information. With life happening so quickly, it can be easy to forget about keeping insurance policies up to date, however, major changes can have a profound impact on coverage and premiums. Be sure to conduct insurance audits often to ensure your policies are still meeting your needs. 

Contact us to see how we can help. 

The Difference between Segregated Funds and Mutual Funds

Segregated Funds and Mutual Funds often have many of the same benefits such as:  

  • Both are managed by investment professionals. 

  • You can generally redeem your investments and get your current market value at any time. 

  • You can use them in your RRSP, RRIF, RESP, RDSP, TFSA or non-registered account. 

So what’s the difference? Who offers these products? 

  • Segregated Funds: Life Insurance Companies

  • Mutual Funds: Investment Management Firms

Why is this important?  

  • Since Segregated funds are offered by life insurance companies, they are individual insurance contracts. Which means….

  • Maturity Guarantees

  • Death Benefit Guarantees

  • Ability to Bypass Probate

  • Potential Creditor Protection

  • Resets

  • Mutual Funds do not have these features.

What are these features?

Maturity and Death Benefit Guarantees mean the insurance company must guarantee at least 75% of the premium paid into the contract for at least 10 years upon maturity or your death. 

Resets means you have the ability to reset the maturity and death benefit guarantee at a higher market value of the investment.

Bypass Probate: since you name a beneficiary to receive the proceeds on your death, the proceeds are paid directly to your beneficiary which means it bypasses your estate and can avoid probate fees. 

Potential Creditor Protection is available when you name a beneficiary within the family class, there are certain restrictions associated with this. 

What are the fees?  

  • Segregated Funds: Typically higher fees (MERS)

  • Mutual Funds: Typically lower fees

We can help you decide what makes sense for your financial situation.