Although many in my industry would say tax season is March & April, I would strongly disagree.
Tax season, at least with your bookkeeper, should be November & December.
Tax season is about doing your income tax return and paying the taxes that you owe. But without planning the income you are taking, that may not always be the best approach. Good bookkeeping will put you in an ultimately position tax situation.
What do I mean?
Simply put, planning your income talks about making sure that you are taking the income out of your company in the right way, so that when you get to your accountant to do your tax return, you are in the ultimate tax situation.
Is my accountant right?
In a lot of cases, we see business owners simply take money out of their company without declaring it as payroll. When the time comes for your year end, you have tied the hands of your accountant, and now he has limited options on how to declare that income to Revenue Canada. In many cases, you are issued dividends, and your taxes are done on dividends. But is that the correct way? You think your accountant is doing right by you, correct? Accountants are pretty smart people, but they don’t always have all the information at hand to make the right decision.
During an income planning session, we listen to what your company does, who is involved, and then we apply the knowledge to your personal situation.
Give me an example
Sure. Remember that everybody’s situation is different. There is no “right” answer. The “right” answer is the one that is right for your situation.
Let’s say you are married, with a wife that stays at home and looks after your two children. You make $100,000 per year in income. If you accountant gives you dividends, that income is “marked up” to $125,000, so you pay tax on $125,000 as your “line 150”. At $125,000, you will pay tax at a rate that is not in the lowest tax bracket. However, if you pay your wife a portion of that money, you BOTH can pay a lessor tax rate that is split between you. Your bookkeeper should be able to give you guidance on how this is done.
Assume that you are a single parent, and you do not have a savings or retirement strategy. Your accountant pays you dividends every year. You know that you can always count on Canada Pension Plan in retirement in order to provide you with an income. NOT CORRECT. Dividends do not have you pay into the CPP plan, and therefore you lose your CPP contributions, which is what determines what you are paid when you retire. If CPP is part of your retirement strategy, you should not be taking dividends. Your bookkeeper can give your accountant the information they require, to help you decide how to maximize your income and meet your CPP objectives.
You are working in the oilfield, and you have Worker’s Compensation coverage. You are covered for $60,000 per year in case of injury. However, your accountant pays you dividends every year. Did you know that you likely do not qualify for that WCB coverage, and therefore you are spending money that you can never claim. Your bookkeeper should address this in your yearly bookkeeping filings for your T4 slips.
Which one is right?
The “right” one is the one for you. Your situation is unique, and so should your income strategy. There is one thing I am sure of…asking your accountant to “save you taxes” when you have not decided how to take your income is very much putting the cart before the horse. To pull that cart, you need to buy a horse first. And, chances are….that is not a write off.
http://www.oncorebookkeeping.ca/wp-content/uploads/2016/06/logo-1.jpg00oc_adminhttp://www.oncorebookkeeping.ca/wp-content/uploads/2016/06/logo-1.jpgoc_admin2017-02-07 19:08:442017-02-02 23:15:12Minimize taxes by PLANNING your income