Canadian controlled private corporation

Here are a few principles to be used in assessing a compensation plan for the owner/manager of a Canadian controlled private corporation. There are also pitfalls to watch for.

Pitfall 1: The accumulation of investment assets in a corporation may adversely affect the ability to claim the capital gains deduction when the shares are sold.

Pitfall 2: Ensure that a family member has enough earned income to participate in deferred income programs to the extent desired.

Pitfall 3: A compensation plan which minimizes taxes in the short term may have longer term negative implications.

Pitfall 4: A shareholder may be planning on using his or her capital gains deduction to shelter the gain on a sale of shares only to find, when the sale if to be concluded, that a CNIL balance blocks access to the deduction.

Pitfall 5: A loss on a loan made or a guarantee given to a small business corporation by someone other than a shareholder will not be an ABIL unless interest is charged on the loan or the guarantee is given for consideration.

Here are some questions that may be of use in assessing your client's financial position and in establishing a compensation plan. you have a current tax profile of each family member who is to be covered by the plan - income from other sources, personal credits, RRSP contribution room, CNIL balances, and prior year ABIL claims?

• Are there non-transferable personal credits to be utilized? Have these been quantified?
• Is a salary/bonus desirable for any family member to ensure maximum participation in the CPP, or to permit RPP or RRSP contributions?
• Is a dividend desirable to reduce or eliminate a CNIL balance?
• Is any corporate income subject to tax at other than small business rates?
• Does the corporation have refundable taxes on hand? If so, a dividend to recover these is almost always advisable.
• Are any shareholders taxed a low - or middle-bracket rates? If so, consider leaving income to be taxed at high corporate rates if the payment of an eligible dividend attracts little tax, or saves tax on other income.