C-Store Life Magazine
Title: Tax tips and strategies for C-Store owners
C-Store operators like to think of themselves as independent players, yet all have a silent, lazy partner, who contributes little and grabs a big chunk of the profits. That partner is government. That’s right, federal, provincial and municipal bureaucrats grab up close of half of everything that Canadians produce each year, through income, sales and other taxes and levies.
In fact, many Canadian businesses can improve their profitability far more by efficiently navigating the workings of taxation law and regulations, than through any productivity enhancing venture. In this article we will outline tax tips and strategies to help C-Store owners keep as much of their heard-earned income as possible, so they can retire early and take advantage of the fruits of their hard earned labour.
To incorporate or not?
One of the first decisions that C-Store owners need to make when setting out a tax planning strategy is whether or not to incorporate, says Sonny Bernard, a tax partner at Bessner Gallay Kreisman. Incorporating provides C-Store owners several advantages. These include limited liability against a creditor seizure of personal assets in the event of a bankruptcy, a lower tax rate at the corporate level, and potential tax deferral opportunities for those who keep want to reinvest their money in the business (by for example expanding their stores or buying other locales to form a mini-chain). Incorporating also provides store owners the option of paying out profits in the form of dividends, which in some cases may be taxed at a lower rate than salaries, says Bernard.
The disadvantage is that dividend income does not qualify as “earned income” (a threshold that the Canada Revenue Agency uses to determine a taxpayer’s maximum RRSP deduction). Nor is dividend income eligible to be used as a base for Canada or Quebec Pension Plan deductions. “The other major disadvantage is that businesses that incorporate must file two sets of tax returns,” notes Bernard. “That’s good news for us accountants. But most individual store owners may be best off by running their outlets as sole proprietorships.”
Claim all general business deductions
Individual convenience stores, even sole proprietorships, are regarded as small businesses. That means they are entitled to deduct all of the expenses that they incur to produce income. This includes merchandise purchases, rent, electricity, heating costs, salaries and other expenses. However there is an important caveat: to claim a deduction, a business has to prove that it incurred the expense. That means it is important to keep all of the invoices that you get.
To give an idea of how important that can be, imagine a C-Store owner who loses or misplaces an invoice for $1,000 (plus sales taxes) worth of confectionary products that he picked up at Club Price to stock on his store shelves. Right off the top, he loses the ability to claim GST and PST credits, which in Quebec work out to $113.93 (sales tax rates vary from province to province. The store owner also loses an expense on his income statement, which in turn artificially boosts the profits that he reports and the taxes he pays. If he is taxed as a sole proprietorship, his marginal tax rate could easily be 40 percent, in which case he would pay $400 in additional income tax. In short, losing that one receipt would cost the store owner $113.93 + $400 + $513.93. In short: keep your tax receipts. They are like gold.
Personal expenses incurred for business purposes
Business owners can also write off certain personal expenses, if they were incurred to help the business earn income. For example if you use a home office entirely for business purposes, say to do your accounting and other paperwork, you are entitled to deduct the portion of your rent or housing expenses that relate to that office space.
The same thing applies to your car. If you use your automobile or small truck for business purposes, say to visit suppliers, pick up merchandize, or to travel between various stores that you own (travel to and from work does not count), then you are entitled to deduct mileage expenses that relate to the distance driven. If you use the vehicle entirely for business, you may be able to deduct the entire cost of the vehicle. However you will then incur a special taxable benefit which will be listed on your T-4 slip.
Meals and entertainment expenses are another often overlooked potential deduction that can be taken, as long as they were incurred for business purposes, for example if you took a supplier, lawyer, accountant or potential promotional partner out to lunch to discuss business matters. They are some limitations. For one, you are only allowed to deduct half the amount you spend. In addition, your total deductions cannot exceed one percent of your total sales.
Registered Retirement Savings Plans
C-Store owners, particularly sole proprietorships, generally do not have lush pension plans like those of their government bureaucrat “partners,” (which C-Stores in large part pay for). In short, that means they have to set up their own. One of the best ways of doing that is to set up a Registered Retirement Savings Plan, which incidentally is one of the best tax deferral opportunities out there.
C-Store owners are entitled to contribute up to 18 percent of their earned income to their RRSPs. All earnings that accumulated within those plans grow free of taxes until the plan holder turns 71, after which the plan holdings must gradually be withdrawn. At that time the contributions and accumulated earnings are taxed in the plan holder’s hands, at a rate that is presumably lower than it was at during his peak earning years.
Yet while building an RRSP may seem like a no-brainer strategy, according to an Ipsos-Reid study conducted for the RBC Financial Group, as many as one third of Canadians do not do so. On a specific year basis the data look even worse. According to the Canada Revenue Agency during the 2009 taxation year, only 5.95 million Canadian taxpayers claimed an RRSP deduction that year - only 24 percent, of the 24.49 million returns filed.
Salaries to wife and kids
One great and perfectly legal way to dramatically reduce the tax that you pay is to allocate salaries to your wife and kids for any work that they do in your convenience store. This practice, which is known as “income splitting,” works because Canadians get thousands of dollars of personal exemptions each year. Furthermore the first dollars that they earn are taxed at lower marginal rates, than subsequent ones. In short, you and your spouse will pay far less tax if you each report $50,000 salaries, than you would if only one of you reported a $100,000 salary.
The caveat though is that you can only pay your spouse a salary for tax purposes for work that they actually performed, and the amount has to be reasonable. The same thing applies to your children. If they help you out for a couple of hours a week during their spare time or during the summer holidays, you can pay them an equitable salary, which in turn they can use to pay their own expenses. Although you may be ineligible to claim all of your Child Tax Credits if that happens, your tax bill will almost surely be lower than if you had paid the salary to yourself, and had paid the kids’ expanses out of your own pocket.
Tax Free Savings Accounts
Tax Free Savings Accounts (TFSA) are a great way not just to defer tax, but to avoid it altogether. You can contribute up to $5,000 each year into your TFSA and the interest you earn accumulates tax free. That may not seem like such a big deal these days because interest rates are so low, however you can also contribute stocks to your plan and the dividend income and capital gains that you earn on them accumulate tax free as well. You can double your benefits from TFSAs by having your spouse contribute to a plan of their own.
Plans like TFSAs are the reason that the rich get richer and the poor get poorer. The vast majority of Canadians simply do not have the capacity or savings discipline to put that kind of money away each year. However if you don’t, then you are subsidizing tax breaks for the rich. In short, don’t get left behind. Start your TFSA today.
Registered Education Savings Plans
Many Canadian C-Store owners are first generation immigrants from countries such as Korea, China and India, whose first experience in business here was in the industry. That said, their kids, like those of many entrepreneurs, aren’t always as enthusiastic about the family business as the parents were. In fact second generation Canadians regard education far more seriously as a way of getting ahead in life.
One of the best ways for C-Store owner/parents to help them do that, is to invest in a Registered Education Savings Plan. RESP contributions are not tax deductible, however taxes on income and growth that result from them are deferred until the amounts are withdrawn to pay for the kids’ education, and at that time they are taxed in the child’s hands, which usually means a low rate, since they are in school at that time. Through the Canada Education Savings Grant, the federal government contributes 20 percent of the first $2,500 of annual RESP contributions.
While most C-Store owners are fairly modest folk, some manage to expand beyond their initial store to buy additional outlets. Others even form small chains, with up to a dozen or even more stores under management. Those that have accumulated significant corporate wealth may consider arranging an estate freeze. Estate freezes are tax loopholes that the super rich use to avoid much of the deemed disposition taxes that generally occur when someone dies.
The way it works is that the business is valued, and voting preferred shares in that amount are transferred to the owner, with all common shares transferred to the children. As a result, the value of the holdings is “frozen” in the parent’s hands, while all future appreciation takes place in the kids’ hands. This benefits both because owners can continue to draw funds from the business through salaries and share redemptions, while the kids pay less, or even no taxes when they inherit the company. However as Sonny Bernard points out, the institution of the $750,000 capital gains exemption has drastically reduced the need for many Canadians to use estate freezes.
Only the super-rich need apply.
For more information about Canada’s taxation regime, you can check out the Canada Revenue Agency’s Web-site at: http://www.cra-arc.gc.ca/menu-eng.html:
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Peter Diekmeyer Communications Inc.