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Structure your business plan with taxes in mind

Kimberly Shipley for Progressive Dairyman Published on 31 December 2018

One outcome of being profitable is paying tax – especially in a farming context where cash-basis accounting is the norm. There are many different tax plans to choose from, and the key to a successful one is ensuring it fits your business and family needs first, then determining the most tax-efficient plan.

This is where your business advisers can help. They can determine if and where there are opportunities to adjust your business plan to reduce tax owing while still fitting with the overall profitability of your business and practical execution.

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As a business owner, you should have a business plan – a plan that outlines what you want to happen in your business today and tomorrow – and the sooner you share that plan with your business advisers, the better equipped they’ll be to advise on whether there’s anything you can do to improve your tax outcome.

This is more critical than ever in an era of significant tax changes, such as the new Tax on Split Income (TOSI) rules and the change from cumulative eligible capital (CEC) pool to capital cost allowance (CCA), as well as investment income limitations.

The CEC to CCA change means producers can no longer pool intangible assets, such as quotas, good will or contracts.

Under the new rules, if you’re thinking about selling something – such as equipment, land, a building, quota or cows – you might want to claim less of a write-off against the item you’re going to sell so there is less of a gain, as you will be spreading out the gain over a matter of years. Otherwise, you could wind up with far less cash than anticipated on a sale – and a larger tax burden.

Other possible adjustments to a tax plan could include something as simple as spreading income to access smaller tax brackets over several years instead of incurring income all in one year – a good strategy if you’re close to exceeding your tax bracket.

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Or it could be more complex, such as setting up your company to ensure income paid to family members is not subject to TOSI. (This would mean family members would not have access to graduated tax rates when receiving payments out of the company.)

The best tax plans not only fit your business today, they plan ahead. Last-minute or after-the-fact tax plans are typically weaker and less likely to yield opportunities that minimize your tax bill.

A good rule of thumb for a tax plan is: Your business should always come first; tax shouldn’t be the driver. If you structure your business just for tax purposes, you might miss the big picture of what makes sense for your business as a whole.

To this end, it is difficult to compare your situation to someone else’s. If someone you know tells you about a great tax plan that saved them a lot of tax, bear in mind: While it might have worked in that person’s business, it doesn’t necessarily mean it’s going to work in yours.

Buying a tractor just to save tax, for example, is not a good overall economic decision.

However, if you actually need a tractor, purchasing one just before year-end is best because you will receive the tax write-off sooner. Or consider leasing, since leasing a tractor would qualify for a write-off as you make the payments, as long as the lease is set up properly.

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Tax efficiencies aren’t just about business assets, either. Say you’d like to buy a vacation property in five years; your accountant can help you build towards that goal in a tax-efficient way, such as taking money out of your company and spreading out your personal income over five years rather than waiting until year five.

Be clear about your personal and business goals (including estate planning) and share them regularly with your accountant, banker, lawyer and investment adviser.

Knowing what your short-, medium- and long-term plans are allows us to make sure we’re helping you achieve your goals and you’re doing so in the most tax-efficient way possible.  end mark

Kimberly Shipley
  • Kimberly Shipley

  • Business Adviser
  • MNP
  • Email Kimberly Shipley

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