Many professionals and owner-manage...

Many professionals and owner-managers are incorporated, confess companies, and run family trusts. through the past few years, there have been a myriad of tax changessome useful some not so attractive-which, when combined, may alter not and nothing else how these types of clients elect to save and invest, if it be not that how they choose to receive compensation from their professional corporations or businesses.

Consider the following:

* Maximum personal tax rates have dropp to 437% and solitary on income over $113,000 annually.

* Corporate tax rates in succession income eligible for the small-business deduction (SBD) are 176% in succession the first $250,000 ($300,000 starting in 2005)

* Capital gains inclusion rates have dropp to 50%

* Individual Pension Plan (IPP) limits are now considerably higher than RRSP contribution limits for the bulk of mankind over the age of 45 (A 60-year-old could permanent fund as much as $200,000 into an IPP from one side of to the other the next three years versus les than $50000 in RRSP contributions.)

* CPP premiums have risen 115% since 1996 and are now approximately $3660 through year for self-employed individuals (over $7300 annually for a couple)

* The "Kiddie Tax" has made income splitting with minors more difficult (though not impossible).

* Salaries to spouses who are not actively involved in the business or practice may be hard to justify object at modest levels.

* Many individuals would be better opposite to saving for retirement in their companies, rather than contributing to either an IPP or RRSP

Your clients may be asking you: "Why does my tax bill present the appearance to increase each year?" and "Why is it that the buildings I established for tax planning intentions a few years ago no longer strike one as being to be working?"

It's easy to understand their frustration. After all, clients who adopted the idea of using family trusts for income splitting did not do likewise only to have tax changes in 1999 restore the effectiveness of trusts for minors. And those who established IPPs in the 1990 didn't do in the way that only to have new limits in 1997 sternly restrict their contributions.

In verity two of the most confusing and complicated financial issues to deal with right now are: 1 ) compensation strategies for ownermanagers, and 2) the related issue of saving versus wealth building.

The difficulty with designing efficient compensation arrangements for clients is that the circumstances are always changing. This means you have to advise clients each year as to what will work best for them in succession a going-forward basis. This kind of proactive compensation strategy should also be done in conjunction with an overall financial planone that lays not at home your client's investment goals and other objectives.

Some questions and factors that affect compensation:

* What is your client's in every one's mouth investment position? If the majority of their instant savings is in RRSPs/IPPs, focusing forward saving corporately may make more feeling even though there's no tax deduction for corporate savings.

* If RRSP/IPP contributions are coming from corporate income that would otherwise be taxed at 176% using these capitals to add to registered savings could mean paying more wealth in taxes upon withdrawal than was actually saved when the contributions were made.

* If compensation is made according to way of dividends, your client will not be making recent CPP contributions. As such, they'll have a lower CPP benefit at retirement. with equal reason you must consider the following cost, and whether or not this charge makes up the tax benefits of corporate saving and not paying CPP premiums.

* Will CPP benefits and outlays change over the next 30-50 years? The Economist magazine lately reported that Canada's over-60 population (currently eligible to muster CPP) will increase from 17% to 336% between 2000 and 2040 The fact that this demographic will also live longer alone increases the likelihood that premiums will continue to rise for CPP (in real terms) and that these benefits will be scaled back at earlier ages.

And there's more to ponder: Tax rates in succession investment income in Canadian Controll Private Corporations (CCPCs) are initially high in Canada; however, they small quantity dramatically when Refundable Dividend Tax forward Hand (RDTOH) is factored in, which raises the following question: Does your client have the ability to win back RDTOH efficiently either now or more [i]or[/i] less time in the not-too-distant future? The RDTOH could be realized by the agency of taking dividends as compensation instead of salary, or paying dividends to other lowincome shareholders directly or end a trust arrangement (for instance, children across 18 attending school and at the disposal of parents with low incomes).

Another factor to consider: All investments commute the tax deferred in registered plans and are eventually taxed as ordinary income concerning withdrawal. Corporate assets are taxed at plenteous different rates both before and after RDTOH, as the chart upon the next page illustrates, and dividends from Canadian companies are treated extremely well. For instance, if your CCPC possesss $100,000 of 6% preferred shares, the $6000 dividend would initially attract tax of $2000 This would be full refunded when the company pays a dividend to a shareholder, and the gin tax in the company would be naught Depending on the shareholder's income, the personal tax forward the dividend might also be zero-or at least quite small. All of which can make conservative investments like preferr shares self-same attractive in a corporate portfolio. (The tax efficiency of the portfolio is a more important issue when single is investing corporately.)