You’re about to sell your business in a major acquisition deal, worth $7.3M, and your accountant breaks the news that you need to have proper tax structuring, or you’ll be required to pay taxes of $1.8M. That means you’ll be leaving about 25% of the deal on the table.
Many business owners face a similar scenario because they fail to engage in thorough tax planning before a merger and acquisition transaction. If you’re a Canadian or US founder with a business generating $1 to $10M annually and planning to scale, acquire, or exit in the next 3-5 years, take advantage of tax structuring and avoid unnecessary liabilities.
Corporate tax planning goes beyond compliance. It gives you control over how and when to pivot, exit, or expand.
In this blog, we expound on corporate tax planning and why it’s crucial for your business. We also explore how it supports exit readiness and how to integrate it with M&A advisory, fractional CFO services, and cross-border tax management.
Is Corporate Tax Planning Essential for Your Business?
Absolutely.
Corporate tax planning matters because it directly affects the value and success of your transaction. Without it, you risk LCGE disqualification, regulatory penalties, overpaying taxes, or even unnecessary tax audits.
Therefore, you need tax planning services, especially when:
- Preparing for an Exit: When exiting, your focus is usually on after-tax profits. If you work with the tax compliance and fractional CFO experts, you increase the likelihood of getting a Lifetime Capital Gains Exemption and securing a profitable deal structure.
- Scaling Your Business Operations: Growing your business, whether it’s increasing revenue or expanding into cross-border activities, might attract tax complications. So, it’s crucial to have an effective tax structure in place.
- Planning to Acquire a Business: Whether you intend to acquire a business in Canada, the US, or both, careful tax structuring can expand your financing options. Besides, you can reduce your purchase price and accelerate your business’s growth.
Objectives of Corporate Tax Planning
When you treat corporate tax planning as a strategic function, you can dictate your business income before the IRS or CRA does.
You’ll not only reduce taxes but also protect and grow your overall net worth, ensuring you have more profits to reinvest in your future business growth.
You can consider corporate tax planning if you want to:
- Minimize Overall Tax Liabilities: Use tax planning to reduce your tax burden. It leverages what is legally allowed under the law, including specific timeframes, tax opinions, entity structure, credits, and exemptions, such as LCGE, to retain more of your income.
- Ensure Legal Compliance: Forward corporate tax planning solutions eliminate compliance gaps and penalties linked to amended returns or missed deadlines. Remember, tax laws keep changing both at the federal, state, and provincial levels. Hiring professional entity restructuring services can ensure that you are informed of any changes in tax rules and regulations.
- Optimize Tax Benefits: Tax planning influences the deal structure, which determines the tax complications. If it’s a share sale, the seller pays lower taxes if they qualify for capital gain exemptions. If it’s an asset sale, the seller enjoys larger tax deductions if the assets have a higher recorded value. By carefully choosing how the business is sold or bought, you can maximize deductions and optimize financing.
- Manage Risks: Strategic corporate tax planning helps prevent surprises and maximize returns. Through tax due diligence, it identifies potential adverse events and manages them promptly, ensuring the business owner does not inherit avoidable legal issues.
- Facilitate Long-term Financial Planning: By managing a corporation’s tax liabilities, tax planning frees up more finances that can be reinvested, transferred to savings, or used in other investments. Ideally, it helps you keep more after-tax profits.
Whether you’re planning an exit, structuring your business for acquisition, or want strategic tax planning to get a profitable transition, you should get a tax-planning roadmap tailored to your business.
At JS CPA Strategic Solutions, we deliver tax and compliance services as part of our M&A advisory framework. We analyze your tax structure, forecast your taxes, and identify opportunities to optimize them.
Book your discovery call today and discover how we can optimize your tax strategy and maximize your business value.
Types of Corporate Taxes to Consider
To help you plan effectively, you must navigate several tax obligations.
Here are the four types of corporate taxes:
1. Federal and Provincial Corporate Income Tax
These taxes must be considered when structuring your exit, acquisition, or scaling transactions. However, how much you pay depends on the size of your business, industry, and provincial or territorial rates.
The federal tax rate in Canada for general corporate income is 15%, and 9% for Canadian-controlled private corporations able to claim small business deductions.
Provincial rates range from 0% to 15%, with a business limit of $500,000 to $700,000. If you’re a Canadian or US resident operating from both countries, you face tax complexities. You have state-level and provincial-level tax obligations to navigate, and an expert can ensure you stay compliant while retaining a large portion of your income.
2. Cross-Border and Withholding Taxes
The income tax treaty between Canada and the US, administered by the Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA), lowers cross-border tax obligations and prevents double taxation.
Canadian taxpayers earning US income can claim a credit against their Canadian tax bill to offset their US taxes. In addition, the treaty also allows withholding reductions from 25% to as low as 5%.
3. LCGE and Capital Gain Tax
Capital gains taxes can significantly reduce the amount you take home after your sale.
The Canadian government taxes 50% of the realized gains. But the Lifetime Capital Gains Exemption (LCGE) minimizes capital gain tax, with the current limit on small business shares set at $1.25M.
Core Principles of Effective Corporate Tax Planning
Corporate tax planning emphasizes four core principles that make it a proactive, progressive tool in your business.
You should apply these principles:
- Flexibility and Adaptability: Understand the constantly changing economic policies and tax laws. So, it’s crucial that your corporation is flexible and adaptable in tax planning to maximize after-tax returns and maintain compliance.
- Strategic Timing: You should implement tax planning strategies that support long-term financial success, and they must be executed within a specific timeline. Whether planning to exit the business, sell it, or scale, plan at least 2 to 3 years prior, not at year’s end. Also, the right timing can defer tax liabilities, boosting cash flow.
- Integration with Financial Planning: With the help of fractional CFO services, you should also integrate tax planning into cash flow optimization, financial modelling, projection, and strategic analysis to achieve profitability.
- Structure Influences the Outcome: Use a tax-efficient structure to minimize tax burdens in succession planning. Your tax planning should also align with the legal and operational framework of the tax code to ensure an optimal financial outcome.
Key Corporate Tax Planning Strategies
Effective tax planning in corporations involves proactive approaches that go beyond tax compliance.
These are the critical parts of tax planning:
- Personal Corporate Tax Integration: Corporate taxes should align with your personal taxes to avoid double taxation and inefficient personal expenses. Strategic integration ensures that your company profits are taxed once.
- Salary vs. Dividend Optimization: The goal is to have a higher after-tax net worth to generate wealth. It involves implementing tax-deferral strategies to achieve high after-tax corporate profits, after personal income tax.
- Expenses Prepayment: Often done to reduce taxable income in the current year or to aim at higher profits projected in the following year. It involves paying deductible costs in advance and spreading the tax deductions over time.
- Income Deferral: Defers income tax payments to a later date. It ensures a business has sufficient cash flow to reinvest and drive growth. The deferred income may end up at a lower tax rate than what the company would have paid. This is one of the complex strategies, and may attract penalties if not approached correctly.
- Transfer Pricing: Minimizes the tax burden for multinational corporations by applying the arm’s-length principle.
- Tax Credit Utilization: Involves using available tax credits to reduce tax liability.
- Depreciation Maximization: Usually applied by the buyer to reduce their future taxes.
Corporate Tax Planning Process
Each of the tax strategies above follows a systematic process. These are the five common steps:
1. Needs Assessment
Starts with a comprehensive review of your business’s tax position and objectives. You should check into your tax filing history, the structures in place, and any inefficiencies that could negatively impact your deal.
If you’re preparing for exit, acquisition, or to scale, this stage helps you identify opportunities to reduce tax liabilities. You’ll also have a clear view of your business’s financial health.
2. Goal Setting with Timelines
Do you want to implement tax planning for a smooth succession, improve cash flow, or maximize your valuation? Define your tax-planning goals and select the right tools and strategies. Remember to set timelines for tax optimization. For instance, if your goal is to scale, plan for 3-5 years ahead.
3. Strategy Development
With the assessment report and goals set, you can now develop a tax plan that runs for at least 3 to 5 years. Remember to assess your tax strategy regularly to identify areas for improvement. For instance, it takes 24+months to restructure a corporation that meets the QSBC criteria.
4. Implementation and Execution
You can execute your strategies and ensure that board resolutions, compliance filings, and shareholder agreements are maintained throughout the implementation process.
5. Ongoing Monitoring
Tax planning employs flexibility, allowing you to make the necessary adjustments in response to changes in tax laws and regulatory updates. This is essential to stay current with federal requirements, IRS, and CRA publications.
Common Tax Planning Mistakes to Avoid
For you to have successful tax planning, there are mistakes you should avoid. Let’s check them out:
- Not taking advantage of Capital Gains Taxes: These taxes can significantly reduce your investment returns. However, holding your investments for the long term can help minimize your capital gains, especially if you are subject to higher income tax rates.
- Not Paying Attention to Changes in Tax Law: If you overlook the ever-changing tax laws, tax codes, and tax rates, you can fall into financial pitfalls.
- Overlooking the Need for Long-Term Tax Planning: If you focus on short-term tax planning, you can miss out on opportunities to maximize your exit or expand your business.
- Ignore Cross-Border Tax Implications: If you’re a Canadian business operating in the US, you are likely to pay double taxation if you don’t take advantage of the income treaty. You can attract high interest or even trigger tax audits.
- Managing Tax Planning in Isolation: Another mistake is treating tax planning as a separate activity from comprehensive financial planning. If you don’t integrate it with other financial strategies, you can leave a lot of money on the table. That’s why, at JS CPA Strategic Solutions, we offer a Financial Soundness Roadmap, a custom financial tax planning analysis for corporations.
Frequently Asked Questions (FAQs)
Below are commonly asked questions about corporate tax planning:
Can Corporate Tax Planning Influence Shareholder Returns?
Yes, significantly. It increases after-tax profits, which can be issued to shareholders as dividends, increasing their wealth.
How Often Should Corporate Tax Plans Be Updated?
Tax plans for corporation should be reviewed quarterly and updated annually.
However, changes in tax law, market expansion, significant earnings, or a major acquisition or exit should trigger immediate updates.
Does Corporate Tax Planning Affect Corporate Social Responsibility?
Yes, corporate tax planning affects corporate social responsibility. Lower taxes free up funds for CSR, while high tax burdens can reduce resources for these initiatives.
You should therefore implement responsible tax planning, implement deductions, create transparent reports, and uphold compliance.
Conclusion
Corporate tax planning is a continuous practice that helps minimize your business’s tax liability. It makes a difference between business owners who build and preserve their wealth and those who record losses.
The earlier you integrate it into your business operations, the greater your chances are of protecting your enterprise’s profitability.
If you’re generating $1M to $10M and planning to scale or exit in 3 to 5 years, do not let your deals get held up by tax issues. Get corporate tax planning solutions that bring in expert knowledge into your overall financial planning strategies.
At JS CPA Strategic Solutions, we combine M&A advisory, fractional CFO services, integrated tax compliance, and exit planning as a comprehensive advisory framework.