Many of my clients think of paying taxes as a necessary evil, and pay their instalments grudgingly. However, there is movement afoot to shift this paradigm and examine taxation in light of all the business decisions that are made. Tax planning even for a small business can lead to substantial savings.
A major setback for involving tax planning in formal decision making at all levels of a business is the view that Canadian tax laws are extremely complex. Therefore, fundamental aspects of tax planning are often ignored when making business decisions. Indeed, if you have ever seen the Income Tax Act you would probably agree. I have an annotated copy of the act sitting on my desk which is 2,753 pages long. However, approximately two-thirds of the act deals with highly specialized exceptions and rules while the other third has a logical and compact structure that covers four basic variables: 1. Taxpayers; 2. Types of income; 3. Business structure, and 4. Tax jurisdictions.
Generally, a business owner takes his financial information for the year to his accountant, upon which the accountant prepares the income tax for the fiscal year. If you were to take a more proactive approach to taxation, the owner should be viewing tax as a controllable expense, just like wages, manufacturing costs and other business expenses. It is the job of the outside adviser to interpret the tax laws, but it is an absolute necessity that the entrepreneur and/or manager has a basic understanding of taxation and its implications on the bottom line.
Tax planning is the legitimate arranging of your business affairs in order to reduce or defer tax costs, the key being “legitimate.” The Income Tax Act has been changed to include what is known as the general anti-avoidance rule (GAAR) which attempts to limit what is not legitimate tax planning. One legit way to reduce tax liability is setting your fiscal year end part way through the year, thereby deferring the tax payable until the next year.
Listen: Tax planning should be as closely examined and manipulated as any other balance sheet expense. Talk to your accountant and a tax lawyer.
Jeffrey D. Cowan, B.A., B.Comm, LL.B., M.B.A., is the Principal of Cowan & Taylor, Barristers & Solicitors which practises in the areas of business and real estate law. Cowan appears in Your Money every other week. E-mail firstname.lastname@example.org call 416-363-5046 with questions for future columns. The information contained in this article should not be relied upon as legal advice.