Tax planning is the process of planning and organizing the finances of a company or individual in such a way as to minimize the taxes to be paid and maximize the financial benefit. To take advantage of this procedure it is important to know how it works according to the region in which the business is established, to understand its importance and to be informed about the strategies that exist to carry it out in the best way.

Before you start, you should be clear that tax planning is a legal and document-backed tool. It cannot be confused with tax evasion. Tax evasion occurs when a person or company omits its tax obligations and violates the established regulations. This can lead to serious penalties and is considered a fraud or crime.

Learn all the essentials you need to know about tax planning in this Zen Valuations article. Remember that if you have additional questions, you can find relevant information in other articles on our business blog, created to make it easier for you to understand many topics.

Why is tax planning important?

Helps save money: By carefully planning how taxes are paid, it is possible to minimize the amount of taxes due and save money in the process.
Avoid problems with the tax authorities: proper tax planning can help avoid problems with the tax authorities, such as the payment of fines or interest for not complying with tax obligations.
Facilitates financial decision making: tax planning can help business owners and individuals understand how taxes affect their finances and make informed financial decisions.

How to do a tax planning in Canada?

Broadly speaking, tax planning strategies in Canada will depend on the type of business you are dealing with (i.e. the kind of products and services you offer in the market), your financial and credit history, your growth and projection expectations, etc.

Keep in mind these 5 determining factors to avoid headaches and unnecessary expenses. Don't overlook any of these things:

1. Know your tax obligations

Make sure you understand what taxes are due and when they are due. This includes federal, provincial and municipal taxes. In other words: we recommend you to analyze all types of taxes in Canada so that you don't get tangled up in dealing with them.

To meet the subsequent criteria or requirements for an ideal tax planning, it is important that you have all the documentation of your business up to date. Have organized data, inventory management, financial performance reports, among other things.

2. Choose the right tax structure for your company

There are several tax structure options available for businesses in Canada, such as corporations, limited liability companies and sole proprietorships. Choose the structure that best suits your business needs and objectives.

This factor will depend on details such as what taxes must be paid, at what time and to whom. In addition, the tax structure may include tax incentives that can help the company reduce the overall burden.

These specifications can vary significantly from one country to another and even from one territory or province to another, so it is important that you inform yourself about the tax laws of the place where you are established with your business.

3. Uses deductions and tax credits

Make sure you know and use all the deductions and tax credits you are entitled to.

Deductions are amounts that are subtracted from an individual's or business' taxable income to calculate how much tax is due. For example, in some cases, a business may be entitled to deduct the costs of materials it purchases for its business or the wages it pays to its employees.

Credits, on the other hand, are amounts that are applied directly to the amount of tax due. For example, a business may be eligible to receive a credit for making investments in certain types of assets or for hiring unemployed workers or workers from certain population groups.

All of this can help you reduce the amount of taxes you have to pay according to the regulations in your region.

4. Plans for income distribution and asset ownership

The way you allocate your income and property can affect the amount of taxes you owe. Be sure to plan effectively to minimize the amount of taxes you owe.

There are many ways to carry out this process. The final decision will depend very much on the particular conditions of each company. Some alternatives are:

Distribute income and assets among the members of a family or among the partners of a business in an equitable manner. This is especially appropriate if everyone involved has a similar role in generating income and acquiring assets.
Make a distribution according to the results of individual work and effort. For example, if one party has worked more hours or contributed more in one way or another, it may be entitled to a higher percentage of income and assets.
Distribution according to the investment made. That is to say, to grant a higher percentage to those who have made more assets or more capital available to the business, in general.
Make a mixed distribution, i.e. from a combination of all these factors mentioned above. In this case, a specialist could help you establish a formula that takes into account work, investment and hierarchy within the company.

5. Receives help from a qualified professional

If you are having difficulty doing effective tax planning or simply want to make sure you are doing everything you can to save money on taxes, consider hiring tax specialists or a qualified professional, such as an accountant or a corporate and tax attorney.

If you require a more specialized consulting session focused on your specific case, you can request one of our services, we will help you avoid problems with the structuring and management of your business!

Tax planning: what is it and why is it very important?