Employee Profit Sharing Plans (EPSP’s), Part 2 of 4

This is the 2^nd part of our 4-part blog series on EPSP’s.  This part will talk more about the benefits of EPSP’s and how they can affect your taxes.

Getting back to EPSPs, there have been some benefits to setting one up.  One is that the trust is not taxed.  No tax is payable by a trust governed by an E.P.S.P. on its taxable income. This means that like registered pension plans or R.R.S.P.'s, the income of the trust accumulates on an untaxed basis.  Another benefit is that employees are taxed annually on the activities of the trust.  The allocations are included in the employee’s income in the year of allocation but income tax is not withheld on the transaction.  The employer will deduct the amounts paid to the EPSP within 120 days of the Corporation’s year end.  The EPSP can be used as an opportunity to reward employees and help create loyalty.

Many EPSPs have been a way for small business owners to distribute profit among family members, children and other employees.  However, the original intent behind EPSPs, as a parliament initiative, was to create a way for business owners to align the interests of their employees with those of the business by sharing the profits of their business with their employees.  The intent was to create vehicles for employees to save money through the EPSP that would be invested tax free, allowing the profits plus gains to be distributed on an annual basis to employees.  Since many business owners have simply been using it as a way to get around CPP and EI, there are currently major consultations going on with the department of finance in the way of proposed changes.  If you’d like to see the consultations that closed just recently (October 25, 2011) go to http://www.fin.gc.ca/activty/consult/epsp-rpeb-eng.asp. 

On part 3, we’ll talk about the different scenarios involved when EPSP rules change. 

Employee Profit Sharing Plans (EPSP’s), Part 1 of 4

This is a 4-part blog series focusing on Employee Profit Sharing Plans or EPSP’s.  I will discuss this in as much detail as I can.  But if you need further clarification, please feel free to contact me at info@kustomdesign.ca.  Thank you and I look forward to hearing from you soon! Here is the first part of our series:

The average person does not hear about things like EPSP’s. However, over the last number of years, with the increase of knowledge through the internet and other sources, many other smaller private Corporations are beginning to use them.  In fact between 2005 and 2009, the number of EPSPs has increased about fivefold, mostly among small, closely-held Canadian-controlled private corporations.

So what is an EPSP?  An Employees Profit Sharing Plan ("E.P.S.P.") is a trust that allows an employer to share business profits with some or all of its employees. The E.P.S.P. does not require registration.  Amounts are paid to a trustee to be held and invested for the benefit of the employees who are members of the plan.  The idea is to invest the funds for growth and future distribution. However, many EPSPs have not been investing the funds, but instead just flowing through the profits to the employees as a way to avoid CPP on the employee’s earnings.  The government is currently looking at changing the rules as they don’t want to see EPSPs used to simply avoid CPP (and EI). 

That being said, avoiding CPP can be a good thing particularly if you’ve maxed out your lifetime contributions.  To find out if you have maximized your CPP contributions, you must contact Service Canada.  Avoiding CPP is better achieved by paying dividends.  Dividends can only go to the shareholders of the corporation (which may also be employees), so you must structure your affairs accordingly.

Next week, we’ll discuss the benefits of EPSP’s.  

Understanding the KiddieTax, Part 3

The 2011 Federal Budget has introduced a new legislation whereby after March 22, 2011 such capital gains will now be subject to the “Kiddie Tax.”  However, other capital gains realized by a minor (for example, from a publicly traded portfolio of assets or shares of a private corporation disposed of to an arm’s length person) will continue to not be subject to the “Kiddie Tax.”  As such, capital gains realized and taxable in the hands of a minor either directly or indirectly is still a common and effective income splitting tool in many cases.

Also, partnerships and trusts that provide services to arm’s length parties are also not subject to the “Kiddie Tax”.  Let’s say that a mom, dad, the kids and a trust all form a partnership.  The partnership’s purpose is to sell food and drink (something a whole family could do).  When the partnership receives profits it can allocate these profits to the partners, which include the minors.  Typically no “Kiddie Tax” would be applied in this instance.

There are other ways to avoid this “Kiddie Tax” as well, such as simply paying the minor for work rendered.  When your children work for you it can be legitimately be their income and taxed in their hands at a much lower rate.

The “Kiddie Tax” definitely makes the family income splitting more difficult, however there are ways to effectively split income.  Careful planning with professionals must be done before implementing any plan.  On top of the current rules making it more complex, the changes in income tax laws each year make it even more difficult.  Thus, if you are looking for ways to income split, don’t hesitate to contact us as we would be glad to plan with you!  Our professionals along with our strategic alliance of tax lawyers can help you plan for all types of tax savings!

This concludes are blog series on the Kiddie Tax. I hope you now have a better understanding of its rules and how it can impact your tax saving strategies! 

Maximizing the use of your corporation Part 4

Maximizing the use of your corporation isn’t all about tax savings.  There are many other things to look at in your corporation such as building a good team and using leverage.  Looking at leverage, businesses seem to have to biggest option of creating sweat equity and you can leverage relationships as well as assets and even credit of the company.  Businesses can build their own credit rating and use assets, including accounts receivable, to leverage for financing.

One last thing that we will look at in this blog on maximizing your corporation is the Capital Gains Exemption.  Every Canadian taxpayer has a $750,000 lifetime Capital Gains Exemption.  This exemption is on qualified small business shares, as well as qualified farming and fishing property.  Here we will just talk about the qualified small business shares which are the shares of your corporation.  So in essence if you sell the shares of your corporation you, and each other shareholder, can make up to $750,000 in capital gains on the sale tax free!  If you don’t use this exemption before you pass away it is gone forever!  So what is it that makes the shares qualified?  Here are the factors:

1.      Must be a CCPC (Canadian Controlled Private Corporation)

2.      The Corporation’s assets must be used at least 90% for Active Income. 

3.      At least 50% of the Corporation’s Assets must have been used to carry on active business in CANADA.

4.      The shares must have been owned by you or a relative for a 24-month period prior to the sale.

5.      The shares can’t be acquired as payment for other shares, stock dividends, or the disposition of a property.

In the case of a trust each of the beneficiaries have the $750,000 Capital Gains Exemption as well as the trust has $750,000 of it’s own Capital Gains exemption on the sale of small business shares.  So it is very beneficial to have the a trust own the shares of the corporation(s).  This leads us into the final part of our series on corporations “Selling, closing, or passing on your corporation”  See you next blog!

Introduction to the Blog Series: "Understanding the Corporation"

A corporation is an entity created by a person or a group of people for the purpose of creating a separate legal entity for themselves.  In other words, when a corporation is created it has a separate existence from any individuals, although it is set up and ran by individuals or groups of people.  This separate legal existence allows for liability protection, tax savings and estate planning to the extent that the jurisdiction where the corporation is set up allows within its rules and laws.  Although Corporations exist in countries all over the world, they are all similar in nature.  Also, a lot of provinces states and countries offer different types of corporations for different purposes.  For example, in The United States Corporations come in many forms such as Limited Liability Corporations (LLCs), S Corporations, C Corporations and more.  In Canada the main Corporations we use are Canadian Controlled Private Corporations (CCPCs), Professional Corporations, Public Corporations, Non Profit and Charitable Corporations.  In the scope of this series we will mostly be discussing the CCPCs as these are the Private Corporations that the everyday Canadian uses.  The other types of Corporations share similar traits and have similar rules so these blogs do have application to the different types of Corporations, and as usual if you have questions you can contact me.

In this series we will go cover what a corporation is, how to understand the basics of a Corporation, why and when to incorporate, ways to structure corporations, steps on incorporating, working with a corporation, maximizing the use of a corporation and how to sell, dissolve(close) or pass on an incorporation.  This is a much needed series that I know will educate and assist many.