Canadian Corporation Tips Thread

[m0rtal]

I'm pretty new to this as I just registered a corp so I'm trying to learn all the tricks. I'll share what I have so far and hopefully others will share their tax saving tips as well as there really isn't too much online when it comes to Canadian corporations and it is a bit confusing.

I've already learned a lot from my accountant but I'm still trying to digest all this information and learn as much as I can.

I thought it would be a little easier to save some of them tax dollars with a corp but it doesn't appear to be so (especially in Ontario). There are obvious tax benefits but it's still pretty hard getting money OUT of the corporation.

Until recently I was unaware of just how INSANE the personal income tax is.

Anyway here's some info I got so far and please correct me if I am wrong somewhere.

Here's a breakdown for those who don't know:

In Ontario personal income tax goes as follows:

$36, 020 or less - 6.05 %
$36, 021 to $72, 041 - 9.15%
$72,042+ - 11.16%

Federal:

$37, 885 - 15%
$37, 886 - $75, 769 - 22%
$75, 770 - $123,184 - 26%
More than $123, 184 - 29%

Highest tax bracket total: 40.6%!! and this doesn't include CPP and EI which will be another couple of thousand and will bring the total probably to something around 44%. (aka anal rape) Before some of you go on telling me you pay as much or around there in the US keep in mind we pay 13% tax on retail goods as well (in Ontario).

Some ways to use/get money out of the corp...

• First up is loans. You can take a loan out of the corp to play around with. Loans are not taxable and you can do whatever you want with that money. However, you have to pay it all back within a year or the corp has to start charging you interest. You can prolong the length of time you have to pay back by borrowing more. e.g. borrow $5k and before year's end borrow $10k and pay back $5k. Bottom line though you eventually have to pay it back but at least you get money to play around with without it getting taxed right away.

• You can pay yourself a smaller amount to remain in the lower tax brackets.

• You can pay yourself in dividends. However, this may or may not be worth it depending on how much you are paying yourself on payroll. e.g. if you pay yourself $36k to remain in the lower tax bracket and pay yourself $150k in dividends your personal income will jump into the highest tax bracket anyway. While dividends are calculated only as a % (don't know the exact figure but 50-60%) on your personal income don't forget that dividends is money the corp has already been taxed on. Sometimes it's better to just pay yourself out rather than take out dividends.

Here's a shady but legal way that is beneficial tax wise but creates other problems for you.

You can employ people like family and friends, etc..

You could for example pay yourself $70k and a family member employee $70k and save a few % that way. The problem with this is (read between the lines) you're stuck with a lot of cash that you really can't do much with other than spend on every day things.

Other benefits:

You can have your year end whenever you like
You can defer taxes in a few ways - still learning about this one but you could for example pay yourself more in the next year if you've already made enough this year.

This is all for now, I'll update if I come across something new. Feel free to share your tips.

None of this should be taken as legal tax advice. This post is for educational purposes only. I take no liability for how this information will be used.

[Benji49]

Paying your family members a salary is a dodge that Canada Revenue agency is familiar with and I wouldn't recommend it unless they are actually doing work.

A "clean" legal way to transfer income is to create two (or three) sets of shares, both enabled to pay dividends. One class is owned by you and another is owned by your family member.

Example:
Let's say your net at year end is $100K

Pay yourself $15K as salary (remember you have a $10k personal exemption plus probably other deductions).

Pay yourself 35K in dividends.

Pay the other shareholder 50K in dividends.

Voila, you have successfully split your income in a manner that is perfectly acceptable to the tax man.

WARNING: You need a competent corp. lawyer who will draw up the share classes in such a fashion that there is a distinction between the two ie get a lawyer who has experience in structuring the corporation in this manner.

SECOND WARNING: In Alberta, last time I checked, for some weird reason, they don't let you designate your spouse as a separate shareholder. Don't ask me why.

One last piece of advice, you should speak to a financial planner or a GOOD Chartered Account about the bookkeeping on your corp. Depending on your circumstances, there are a few other LEGAL ways to avoid tax. Like passing funds to a trust (which can get really complicated so I don't wanna talk about it here).

Whoops oh yeah before I forget don't forget to write off part of your mortgage/rent, telephone, internet and heat/hot water.

[lukem]

Your corporation can make investments as part of it's operations. Property, companies, whatever. In 5 years when you don't feel like doing what you're doing now, you have an income from those investments.

If you've got a wife/kids over 16, I think it should be fine to pay them a salary. As long as you can show the tax man the work that they do, everything should be cool.

Dividends are tricky because your corporation will be taxed on them before they are issued. So the corporation is taxed (what is it, in the 20's or 30%?) and then you'll get taxed on Dividends (I think 15%).

In any event, I agree with Benji, get a good tax accountant and lawyer. They suck the fees, but can save you tons of headaches.

Oh, and be sure your corporation pays taxes. Don't break even or run a loss. That's asking for CRA to chase you down.

[m0rtal]

Originally Posted by Benji49

Paying your family members a salary is a dodge that Canada Revenue agency is familiar with and I wouldn't recommend it unless they are actually doing work.

A "clean" legal way to transfer income is to create two (or three) sets of shares, both enabled to pay dividends. One class is owned by you and another is owned by your family member.

I fail to see how this is any different than employing someone. Both are legal on paper and leave you with the same problem.

Originally Posted by lukem

Oh, and be sure your corporation pays taxes. Don't break even or run a loss. That's asking for CRA to chase you down.

Isn't the point to run at break even? Otherwise you'll end up paying tax twice.

[lukem]

The point is to run as close to break even without getting on CRA's badass list. They want you to pay a token amount of tax at the very least.

I'm only relaying what my advisors tell me and from experience with family who have had similar business setups. Definitely get your accountant involved and ask them what their opinion of CRA's tolerances. Getting audited isn't fun, so I try to stay off the radar.