High Impact Tax Strategies for Business Owners & Their Corporations - Part 2
As an entrepreneur, you face a multitude of challenges in running a successful business. You must keep your eye on the ball in order to navigate the often turbulent waters of the marketplace. To that end, it is important that you have a trusted accountant/business advisor who is proactive in identifying opportunities for you and your corporation.
In our last column, we discussed some high-impact strategies for reducing your corporate and personal income taxes – such as multiplying the small business deduction, paying dividends vs. bonuses, individual pension plans and retirement compensation arrangements. All of these strategies are intended to keep more of your hard-earned profit in YOUR pocket, rather than sending it down the highway to Ottawa.
This month’s column features a few tax credits that could potentially reap thousands of dollars – each year – for business owners and their corporations:
1) Scientific Research and Experimental Development (SR&ED) Tax Credits
In an effort to encourage Canadian companies to invest in experimentation and innovation, the Canadian government has allocated more than $8 Billion each year to assist businesses that undertake such activities. A federal tax credit of up to 35% and an Ontario tax credit of up to 10% can be claimed on qualifying expenditures made by qualifying corporations.
The SR&ED program is Canada’s largest, yet most underutilized, tax incentive plan. Many companies assume they aren’t eligible for the credit because of the common misconception that the advances have to be scientific in nature. This is simply not true. In general, if you have created a new product, process, piece of equipment or software – or improved an existing one – you may indeed be engaging in SR&ED activity.
Let’s put this into perspective: you can effectively recover up to $0.68 of every $1.00 in actual wages spent on qualified SR&ED activities. This means that if your company spent $200,000 in qualified wages, it could recuperate $136,000 to offset against taxes otherwise payable and any remaining balance translates into a direct cash refund. This factors in a very favorable 65% labour bump-up provision to cover estimated overhead costs associated with the qualifying SR&ED activities. Other eligible expenses include materials, equipment and machinery and sub contractors.
2) Apprenticeship Training Tax Credits (ATTC)
Designed to encourage the hiring of apprentices in the construction, industrial and manufacturing sectors, the Ontario government introduced the ATTC in order to make apprenticeship training programs more affordable for employers.
Corporations, proprietorships and general partnerships can obtain a refundable credit equivalent to 25% of eligible expenditures paid for each qualified apprentice they employ. Smaller businesses with payrolls under $500,000 are eligible for an even higher tax credit rate of up to 30%.
Let’s put this into perspective: for each qualified apprentice your business employs, you can get a credit of up to $5,000 per taxation year, for the first 3 years of their work placement. The refundable credit first reduces the Ontario taxes otherwise payable for the taxation year, and any excesses are refunded as cash.
There are over 100 different categories of workers that are eligible for the Apprenticeship Training Tax Credit. They include such trades as sheet metal workers, plumbers, construction and maintenance electricians, hoisting engineers, brick and stone masons, etc.
3) Ontario Interactive Digital Media Tax Credits (OIDMTC)
The OIDMTC is a refundable tax credit based on eligible Ontario labour, marketing and distribution expenditures claimed by qualifying corporations with regard to their work on interactive digital media products. The credit has been designed to encourage development in the area of digital media and can result in significant tax savings.
The OIDMTC is calculated as up to 40% of labour expenses plus marketing and distribution expenses. It is available to qualifying corporations that develop an eligible product at a permanent establishment in Ontario and that file an Ontario tax return. The primary purpose of the digital media product must be to educate, inform and/or entertain and the information must be presented in the form of at least two of: (i) text; (ii) sound and (iii) images. Some examples of acceptable products include DVDs, CD-ROMs, kiosks, interactive websites and digital media games.
Let’s put this into perspective: you can recover up to $0.40 of every $1.00 in wages spent on qualified interactive digital media products made by qualifying corporations. This means that if your company spent $200,000 in qualified wages, it could recuperate $80,000 to offset against provincial taxes otherwise payable and any remaining balance would translate into a direct cash refund. In addition, you can claim marketing and distribution expenses up to $100,000 per eligible product and receive a credit and/or refund of up to $40,000 for these qualified expenditures.
To be certain, it is highly advisable that you involve proactive professional advisors when applying for federal and provincial tax credits. After all, nobody wants to leave money on the table!
About the Author Mitch Silverstein, is a Partner at SBLR Chartered Accountants. 416.488.2345 x 274 or email@example.com. SBLR is a full-service accounting and business advisory firm located in mid-Toronto. With 7 partners and over 40 team members, including a full-time senior tax department, SBLR is passionate about providing creative income tax solutions and high-level growth and exit strategies for profitable, privately-held companies.
Financial Tip… from James Phillipson
In the last article, Part 1 of High Impact tax Strategies for Business Owners, we showed the importance of asking a qualified tax professional about tax planning and a list of questions that would help unearth many missed opportunities for tax savings – see November 2009 newsletter.
The opportunities above reveal that it is essential that you also review with the tax professional the nature of your business, so that he or she can understand whether there is a tax credit or grant that your business may be eligible for. It is very difficult for an accountant or tax specialist who does most or all of the work for you at her office to recognize these opportunities. So, periodically ensure that you meet and tell her about the unusual things that you are doing so that the opportunities are revealed, or better still, invite them for a tour of your business so they are not working in an ivory tower, trying to guess which clients may be eligible for the handouts from government.
One thing that makes theses tax credits so valuable is that although they are credits against Ontario (or federal for the SR&ED credit) taxes otherwise payable, they will be paid out by cheque to many qualifying businesses. For a company with limited or no tax, due to losses or other causes, this can be a huge help with cash flow, when it is most needed.
Also remember that the article above only deals with the most common opportunities and that there are other credits and grants and that there are different programs for businesses that operate in the other provinces and territories.
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