Overview
Developing an effective tax strategy business owner is crucial for maximizing profitability and ensuring long-term financial health. This involves understanding various tax planning techniques, from optimizing income extraction to leveraging available deductions and credits.
A proactive approach to tax planning can significantly reduce your tax burden, allowing you to reinvest more into your business or secure personal wealth.
- Strategic Planning: Discover essential tax strategies designed to minimize liabilities and enhance financial growth for business owners.
- Fund Extraction: Learn how business owners can efficiently extract funds from their companies while optimizing tax implications.
- Capital Gains: Explore the pipeline tax strategy for withdrawing capital gains, a key method for tax-efficient wealth management.
KWB: Essential Tax Strategies for Edmonton Business Owners
Updated March 2025: Due to changing legislation effective January 1, 2024, the living pipeline tax strategy now bears greater risk and is not recommended. We recommend pursuing other opportunities for tax savings.
How Business Owners Can Efficiently Extract Funds
There are several ways to draw money from your company, and they each have different consequences and advantages when it comes to tax planning and optimization.
Drawing money from your company can be done through:
- Salary
When you take a salary, the company manages your income tax deductions before you receive your income, and it is not taxed further afterwards. When paying yourself or your spouse or children a salary, you must be able to demonstrate that the salary is reasonable given the work performed.
- Dividends
Dividends are paid from the company’s earnings after corporate tax is paid and can be paid only to company shareholders.
Tax rates are structured so that whether you pay yourself a salary or dividends, you will ultimately end up with roughly, within 1 or 2 %, the same amount after paying all taxes. However, a big difference between the two options is that dividends offer the deferral of tax and the subsequent growth in investments achieved through the power of compounding. Income splitting is another factor that should be considered when deciding between salaries and dividends.
- Shareholder Loan
As a shareholder in your company, you can take out a loan from the company. This is useful if there’s excess cash in the business and the money is only needed temporarily. The loan needs to be repaid including a reasonable interest rate by the end of the next fiscal year.
- Capital Gains
Capital gains are any profit made by selling a capital or passive asset, like shares in your business, stocks, land, or the business itself. Only 50% of the capital gain is taxed. In order to have capital gains, a transaction must take place.
Pipeline Tax Strategy for Business Owners | Withdrawing Capital Gains
A pipeline is a tax strategy that allows you to extract money through a capital gain rather than a dividend, ultimately saving you between 10-18% in tax depending on your tax rates. In order to utilize a pipeline tax strategy, a transaction must take place. Work with your accountant and lawyer to navigate and ensure compliance with all applicable tax rules and laws.
Since a transaction is required for a capital gain to exist, at least two different parties need to be involved. To accomplish this, a holding company can be created for your company to transact with. With a holding company in place, shares can be sold from one party to the other to create the capital gain.
Pipeline Tax Strategy: Withdrawing Capital Gains
Given the administrative work that goes into a pipeline strategy, and the professional services of a lawyer and accountant to help guide the process, a pipeline strategy makes sense for business owners who draw a lot of money from their company. If you will be drawing more than $200K from your company, this strategy may be advantageous to you.
A pipeline strategy also makes sense if you want to withdraw a lot of retained earnings from your company over a short period of time.
Pipeline Tax Strategy Help
For guidance on the best way to withdraw money from your company, book a consultation with us!
KWB Accountants & Advisors will help you simplify your accounting, improve your profit, and achieve your goals by working with you ON your business.