Uncovering the Myth on Tax Season & Income Splitting!
According to how businesses operate tax season is considered to be in March and April.
However, businesses that plan well and thrive keep their Tax season, at least with their bookkeeper, in November & December.
Come Tax time you want to be filing your income tax return and paying the taxes that you owe. But without planning the income you are taking, that may not always be the best approach. Good bookkeeping will put you in a more focused tax situation.
What does this mean?
Simply put, planning your income talks about making sure that you are taking the income out of your company in the right way, so that when you get to your accountant to do your tax return, you are in the ultimate tax situation.
The burning question most companies ask – what’s the right way to declare my income?
In a lot of cases, we see business owners simply take money out of their company without declaring it as payroll. When it’s time for the year end, your accountant may feel handcuffed if you have been withdrawing funds from your business without declaring that as salary, and now your accountant has limited options on how to declare that income to Revenue Canada. In many cases, you are issued dividends, and your taxes are done on dividends. But is that the correct way? You think your accountant is suggesting the right thing - correct?
Accountants are pretty smart people, but they don’t always have all the information at hand to make the right decision. Whereas a certified bookkeeper can be a trusted adviser and someone like Michele Hyde of Simply BookKeeping1, would assess your business and she will listen to what your company does, who is involved, and then apply the knowledge to your personal situation. Just remember, that everybody’s situation is different. There is no “right” answer. The “right” answer is the one that is right for your situation.
Depending upon your personal situation and the household, and your per year in income your withdrawals from your business may be decided. For example, your accountant may choose to give you dividends, that income is “marked up” to $125,000, so you pay tax on $125,000 as your “line 150”. At $125,000, you will pay tax at a rate that is not in the lowest tax bracket. However, if you have a spouse that stays home you may pay them a portion of that money, so that you BOTH can pay a lessor tax rate that is split between you. Your bookkeeper should be able to give you guidance on how this is done unless your accountant is aware of this situation.
Another example is, assuming that you are a single parent, and you do not have a savings or retirement strategy. Your accountant pays you dividends every year. You know that you can always count on Canada Pension Plan in retirement in order to provide you with an income. NOT CORRECT.
Dividends do not have you pay into the CPP plan, and therefore you lose your CPP contributions, which is what determines what you are paid when you retire. If CPP is part of your retirement strategy, you should not be taking dividends. Your bookkeeper can give your accountant the information they require, to help you decide how to maximize your income and meet your CPP objectives.
Do what feels right!
The “right” one is the one for you. Your situation is unique, and so should your income strategy. There is one thing I am sure of…asking your accountant to “save you taxes” when you have not decided how to take your income is very much putting the cart before the horse. To pull that cart, you need to buy a horse first. And, chances are….that is not a write off.
Simply Bookkeeping1 provides professional bookkeeping services for freelancers, solopreneurs and owners of unincorporated and incorporated businesses. We customize our services based on your needs – we only see some of our clients a few hours a month but others we see on a more regular basis. Our services are reasonably priced and we tightly track the amount of time we spend working for you so you only pay for the services you get. To learn more about us, please visit our website at www.simplybookkeeping1.com or contact Michele Hyde by phone at (647)-668–9363 or by email at firstname.lastname@example.org