Question for Canadian business owners

avatar33

e-Hustler
Dec 5, 2009
3,838
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Calgary, AB
Did you create an incorporation for your online business? Is it worth it to do so in Canada? What are the main advantages/disadvantages (versus being a sole proprietor) and which province is the best (tax-wise) to do this?
 


Yea, I incorporated in Ontario (not saying it's best) for the tax purposes. If you're just starting out and making less than 100k a year, I'd just talk to an accountant and figure out a plan for when it's best to incorporate. You don't need to do it right away, but if your biz is going to take off you're going to want to do it at some point and it's best to know that point ahead of time.
 
I actually just spoke to an accountant for an hour, and he said that 15% is only for the corporate tax, you still have to pay 35%+ (personal tax) on whatever money you take out of the corp for your living expenses.

I knew this 15% sounded too good to be true...
 
yah its 15% base corporate tax, bbuuttttttttt, you can choose to pay yourself a salary ( stay just below certain tax brackets) or, what i do is pay myself dividends.

pros of dividends:

- first 40K a year i pay myself is personal tax free (effect 15% flat rate)
- dont have to pay CPP (wont get it when im 65 either though)
- can pay myself w/e amount i want, whenever i want

cons:
- small lawyer fees every time i pay myself
- dont get to write off salary as a corporate expense
- wont get CPP when im 65...but really You can keep that $ and invest it and make more...its just a lot of people wont...

yah i went with paying dividends, but you def want a corp, you just have more control over taxes and moving $$$$ around and stuff
 
I looked into this quite extensively in the past. Basically came to the conclusion that it
makes sense to Incorporate once you're consistently hitting 75-100k a year.

That's strictly income-tax speaking.. it might make sense to incorporate for liability reasons
or other reasons depending on what exactly it is you're doing with your business.
 
The cheque you write yourself in "Dividend" is tax free (up to $40,000) which your company will be taxed at 15 percent. Why? Because that's the tax rate for Incorporated companies in Canada.

It's a good strategy for "deferring" income so you don't get dinged at over 40% if you were to claim it at a personal rate.
 
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Scenario:

If you make $200K profit in your earnings, with a corp you would pay ~$30K in corporate taxes. You pay yourself dividends of $40K which is personally tax free. So essentially you would have (ballpark example, just take it with a grain of salt):

$200K - $30K corp taxes = $170K left in your biz account
Pay yourself $40K in dividends
You would have $40K in your personal account and $130K in your biz account

Any other payments/dividends will be personally tax deductible. The key is to try and get as much out of your biz account without paying taxes, but still obviously playing by the rules.

So for $40K in personal income, you've paid out $30K in taxes, however you still have $130K for your business.

If you went the personal tax route with all your earnings, you would have roughly 40% personal tax rate (actually would be even higher because you would be in a high income bracket, but just use 40% as an example), so you would be paying $80K in taxes and have $120K in your personal account.

Hope the above makes sense, had a few glasses of wine lol.
 
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Nice, I love scenarios! +rep

I wonder why the accountant I spoke with didn't mention this. I hate how there are so many things to know about business taxation...

So let's say you want to give yourself a 100k yearly salary. Would it make sense to give yourself 40k in dividends (tax-free) + 60k regular salary (taxable at personal income rates so let's say 33% of 60k is around $20,000) so for a 100k salary you'd end up with about 80k net left in your pockets? Does that make sense?
 
So let's say you want to give yourself a 100k yearly salary. Would it make sense to give yourself 40k in dividends (tax-free) + 60k regular salary (taxable at personal income rates so let's say 33% of 60k is around $20,000) so for a 100k salary you'd end up with about 80k net left in your pockets? Does that make sense?

This part I'm not really sure on (I have last year's tax calculations from my accountant but it's all greek to me and am too lazy to break it down :)

Anyways, because you are paying yourself dividends + salary, I'm not really sure if the combined will put you in a higher tax bracket. You'll definitely be exempt from the $40K, but you may pay higher taxes on the remaining $60K. I'm probably talking out of my ass here, but I don't think the $40K in dividends disappears from your net income totals :)
 
The point with incorporating is if you're making more than what you need to live off of, then you keep the money in the corporation instead of your personal bank account. If you're making 40k a year and need the 40k to live off of, then there's no sense in incorporating for tax purposes. However if you're making 100k, and only need 40k to live off of, then you're saving on the taxes of 60k. When I first started making money it was a sole proprietorship and I was paying myself like 30k a month, until I realized how bad I was getting raped on taxes. That's why I said in the previous post make sure you know ahead of time at what point you need to incorporate.
 
Scenario:

If you make $200K profit in your earnings, with a corp you would pay ~$30K in corporate taxes. You pay yourself dividends of $40K which is personally tax free. So essentially you would have (ballpark example, just take it with a grain of salt):

$200K - $30K corp taxes = $170K left in your biz account
Pay yourself $40K in dividends
You would have $40K in your personal account and $130K in your biz account

Any other payments/dividends will be personally tax deductible. The key is to try and get as much out of your biz account without paying taxes, but still obviously playing by the rules.

So for $40K in personal income, you've paid out $30K in taxes, however you still have $130K for your business.

If you went the personal tax route with all your earnings, you would have roughly 40% personal tax rate (actually would be even higher because you would be in a high income bracket, but just use 40% as an example), so you would be paying $80K in taxes and have $120K in your personal account.

Hope the above makes sense, had a few glasses of wine lol.

Can you also use the business account to purchase a vehicle drive a "company car" and stuff like that?
 
Can you also use the business account to purchase a vehicle drive a "company car" and stuff like that?

I believe if your business revolves around using cars, then you can. For instance - cabs, pizza delivery, acai delivery etc.

Not buy a Ferrari and call it a "company car," lol.
 
I believe if your business revolves around using cars, then you can. For instance - cabs, pizza delivery, acai delivery etc.

Not buy a Ferrari and call it a "company car," lol.

You can at least write off all the gas your Ferrari burns driving to/from your office, meetings, etc. :D
 
Incorp - its not that expensive, and the tax breaks are nice, dividends as everyone else has said are the best way to go and save. That being said the CRA is a giant bitch to deal with esp if you have multiple corporations earning at the same time and juggling taxes with them just adds up.
 
I actually just spoke to an accountant for an hour, and he said that 15% is only for the corporate tax, you still have to pay 35%+ (personal tax) on whatever money you take out of the corp for your living expenses.

I knew this 15% sounded too good to be true...

Ya but who said you have to pay yourself that much? Your corp can "own" your car and make payments, it can have "business trips", it can even pay for dinners. Of course, everything has to be within reason. But you know what I mean. The downside is that if you ever to get sued and were to owe a lot of money, all the stuff that corp "owns", will become an asset that can be repossessed or sold to raise $. So basically make sure you have a house that you own :)
 
I believe if your business revolves around using cars, then you can. For instance - cabs, pizza delivery, acai delivery etc.

Not buy a Ferrari and call it a "company car," lol.

Why not? There are places that offer their employees a company car as an incentive.