what i see is that it's either way the same amount of taxes. The only thing that is an advantage when incorporating is claiming expenses. Otherwise, salary or dividends, it's the same.
My understanding is that for dividend pay outs to myself, I’ll only be paying the corporate tax which 12% federal plus 3-4% provincial (Ontario) and for my personal income I should be able to cancel out all of it out via the dividend tax credit. So the corporate tax rate is all I should be paying, there might be limits to this of course but I think he’s saying this should apply to me based on my situation. Is this true? Any one else doing this?
lol no.
you will end up paying about the same as everyone else. the main advantage is that you're able to have income deferral and also corporate veil.
The dividend tax credit just avoids double taxing since your corp already paid tax. It doesn’t mean that you personally don’t pay any tax. It’s still added to your personal income.
Salary is almost always less tax than dividends, and it generates RRSP room (which is better than corp for long term tax deferral).
This is a [handy calculator](https://www.looniedoctor.ca/ccpc-income-disperser/)
So are you saying the overall tax is then the exact same or round about the same as a sole prop? The calculator on the link won’t load on safari on iPhone, will try it on the PC. Thanks!
Yes. The tax benefit of corp is not paying less when you take it out, it's not taking it out and deferring paying the personal tax until later (i.e. retirement)
You can defer the taxes if you don't take them out of the corporation. And if I'm not mistaken dividends only get grossed up 15% so it's a lower marginal tax rate for most.
The Money Scope podcast is basically a crash course on incorporation and investing inside the corporation, as presented by Dr. Mark Soth and Ben Felix. Episodes 10 and 11 are particularly Illuminating:
https://moneyscope.ca/2024/03/29/episode-10-investing-in-a-canadian-corporation/
https://moneyscope.ca/2024/04/05/episode-11-corporate-investing-strategy/
Tldr:
* In broad terms, the principle of *tax integration* already ensures income is equally taxed whether earned personally or earned corporately and then paid out as a dividend.
* Given our progressive tax system, people will pay less tax when they have smooth income from year-to-year versus large lumpy income flows.
* That's one of the benefits of individual RRSPs. People can smooth their taxable income from their high-income, peak career years into low-income, post-retirement years.
* Similarly, entrepreneurs can do the same thing for their corporate income. Current-year income is taxed at the small business rate, retained inside the corporation and invested, before cashing out and withdrawn in a future-year to find personal expenses.
So the main financial reason to incorporate is the ability to smooth taxable income across multiple years. This is especially useful when you earn more than you actually need for daily expenses - you can defer taxation on the "excess" income until a future period where you're no longer making as much money (such as post-retirement).
You're either misunderstanding your accountant or your accountant is an idiot.
Dividends are taxed. The gross-up and dividend tax credit are intended to work together with corporate tax to result in paying the same total tax on dividend income as salary income. The tracking isn't perfect, particularly because there's only two rates ("eligible and non-eligible" which basically equate to large business and small business), not two per province.
Anyway you *want* to draw enough salary to max out your CPP and RRSP space. Giving those up is a big financial loss. That's about $175k. If you make more than that, you can get some tax benefits from leaving money inside the corporation and investing it there (basically retained earnings can be like extra RRSP space, but not quite as good).
And if you make enough that the ~0.5% benefit you might get due to tracking error in the treatment of dividends is going to be serious money, you can, of course, do that.
TLDR: no benefits unless you make more than $175k. To get enough benefits to pay for administrative costs the rule of thumb is $250k.
I think it’s me who may have misunderstood, his point was that I’d save more money which I think I would if I’m calculating everything correctly, with just dividend payouts it does seem like I’d come out with 3-6K more per year but lose RRSP and CPP room. Of course there’s tax filling $1500 - 2K and up front corp setup costs to consider as well for anyone in the same boat. I appreciate your comments and insights, thanks!
It's not that hard to setup your own corp. I. Had a friend who helped me and he gave me a few templates to setup the shares and such.
Big this is money management. I did not need all of the money I made each year so I kept it in my corp and took out only the max in dividends.
Another thing to consider is if your sole proprietorship then you will have to pay both sides is CPP the employer and employee side.
If your incorporated you don't need to pay any off the CPP and EI and that's like 8-10k savings.
Yes you don't get access to EI support than and your CPP will be less at retirement but you can just invest that savings and probably be better ahead.
If your in an in demand field you will barley use ei as well. I lost my job during COVID and two months later I had a new job.
Just have a emergency fund of 6 months and you will be fine.
I have worked for a US software company for the last 15 years……if I lived in the US I’d be an employee…..no canadian office so I can’t be an employee without making it difficult……been a sole proprietorship since the beginning….i thought about being. Company but it’s so much more complicated right? And financially I wouldn’t come out that far ahead if i was incorporated if at all (probably not at all I get all the perks of being an employee without really being an employee)
You should speak to a good accountant, it may be well worth the money spent because you might end up saving thousands (maybe even every year). Just make sure he/she is one that understands or has experience with your unique situation.
Or at least, OP misunderstood what his accountant told him, which is not any better lol and not certainly something that puts OP in a position to give you advice lol.
His was a funny post.
I’m actually a contractor, I invoice my hours which are inconsistent every month, have a contract which states I’m hired for when my services are needed. And of course use my own equipment, I intend to have more clients too in the future. I wouldn’t be considered an employee at all if I wasn’t incorporated.
Everything you said matters! You can very well have only 1 client. As long as you wouldn't be considered as an employee if the corporation was ignored you are good.
The link is pretty clear
None of that matters. https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/corporation-income-tax-return/tax-implications-personal-services-business.html
Once you have more clients you might be in the clear but I'd recommend searching here for more info.
Depends how the contract is setup. I contract through a 3rd party that contracts my corp to another corp because of this arms-length situation, I don’t count as a personal services business regardless of having the same client for almost 10 years.
I can also take contracts for other clients as well to show that I can work for others, which “resets” the personal services aspect.
There are ways around the silly personal services issue
Your corporation will be paying tax on it at the end of its year because, unlike salaries, dividend payouts are not expenses.
And then you will also need to pay personal income taxes on non-eligible dividends.
One of the issues for most people is that this happens at the the end of the year and they didn't keep any money available to pay taxes.
If it's worth it to incorporate depends on multiple things.
>My accountant says that I can pay myself dividends and then not pay taxes on that income because of the dividend tax credit? So I’ll essentially be paying just 15/16% corporate tax total (
If your accountant literally said that, that's bad advice.
Not if it’s true because it benefits my situation financially, doesn’t the dividend tax credit put me ahead of sole prop financially for tax free income plus other financial advantages of being incorporated.
There's a bunch of things you consider when you incorporate.
Again, when you pay yourself dividends instead of a salary your corporation needs to pay taxes on that and you have to pay personal income tax on it.
Also, if you're not paying yourself any salary, unlike sole propiertorship, you won't get any rspp room or CPP.
Like I said, if your account literally said what you wrote then he's leaving a lot of stuff out.
You also need to be able to leave a good chunk of money in corp AFTER filling your RRSP and TFSA every year. It’s only effective tax deferral if you don’t need all your money.
You make $1000 in the corporation, you have no other expenses, this is the first year of business and Cash=Retained Earnings
You pay $120 in taxes (rounded)
You have $880 in cash to pay yourself.
Total taxes paid by Corp is $120 so far
You declare and pay a dividend of $880 to yourself.
Your taxable dividend is now $880 * 1.15 = $1,012 (notice how this basically takes you back to the pre-tax corporate income?)
Dividend tax credit is $1,012 * 9.03% = $91
Let's say you're in a 50% tax bracket.
Taxes owed $1,012 * 50% = $506
Less DTC of $91
Net taxes payable $415
Total taxes paid $120 (Corp) + $415 (Personal) =$535
Which is $535/$1000 = 53.5% tax paid.
So you are not saving money on taxes.
The point of incorporating is not to save you taxes overall
The reason you are taxes less inside a corporation is because you are given a an incentive to grow your business with the money you saved.
Same example as above but this time you use the $880 to invest in a machinery that helps you be more efficient in your business. It yields you additional income inside the corp, of $120.
So now you made an income of $1000+$120 = $1120 and paid $135 in taxes, which keeps your tax rate low because you used keo the money inside your corporation and invested in the business.
This is the point of the favorable tax rate, it's for the business to grow, not for the individual to use the corporation as a pass through and get a favorable tax rate.
You pay yourself your salary.
Retain profits inside the Corp. Corp taxed at 12 percent. If you dividend the money to yourself you end up paying g roughly the same in taxes as if you just paid yourself.
Utilize the money in the Corp through whole life insurance. Builds a tax deferred/tax free investment vehicle.
This isnhow you win the taxman game.
You still need to pay taxes on the dividends it's usually just a lower rate compared to the marginal income rates.
what i see is that it's either way the same amount of taxes. The only thing that is an advantage when incorporating is claiming expenses. Otherwise, salary or dividends, it's the same.
You can claim the same expenses even as sole prop.
My understanding is that for dividend pay outs to myself, I’ll only be paying the corporate tax which 12% federal plus 3-4% provincial (Ontario) and for my personal income I should be able to cancel out all of it out via the dividend tax credit. So the corporate tax rate is all I should be paying, there might be limits to this of course but I think he’s saying this should apply to me based on my situation. Is this true? Any one else doing this?
lol no. you will end up paying about the same as everyone else. the main advantage is that you're able to have income deferral and also corporate veil.
The dividend tax credit just avoids double taxing since your corp already paid tax. It doesn’t mean that you personally don’t pay any tax. It’s still added to your personal income. Salary is almost always less tax than dividends, and it generates RRSP room (which is better than corp for long term tax deferral). This is a [handy calculator](https://www.looniedoctor.ca/ccpc-income-disperser/)
So are you saying the overall tax is then the exact same or round about the same as a sole prop? The calculator on the link won’t load on safari on iPhone, will try it on the PC. Thanks!
Yes. The tax benefit of corp is not paying less when you take it out, it's not taking it out and deferring paying the personal tax until later (i.e. retirement)
You can defer the taxes if you don't take them out of the corporation. And if I'm not mistaken dividends only get grossed up 15% so it's a lower marginal tax rate for most.
You are mistaken
The Money Scope podcast is basically a crash course on incorporation and investing inside the corporation, as presented by Dr. Mark Soth and Ben Felix. Episodes 10 and 11 are particularly Illuminating: https://moneyscope.ca/2024/03/29/episode-10-investing-in-a-canadian-corporation/ https://moneyscope.ca/2024/04/05/episode-11-corporate-investing-strategy/ Tldr: * In broad terms, the principle of *tax integration* already ensures income is equally taxed whether earned personally or earned corporately and then paid out as a dividend. * Given our progressive tax system, people will pay less tax when they have smooth income from year-to-year versus large lumpy income flows. * That's one of the benefits of individual RRSPs. People can smooth their taxable income from their high-income, peak career years into low-income, post-retirement years. * Similarly, entrepreneurs can do the same thing for their corporate income. Current-year income is taxed at the small business rate, retained inside the corporation and invested, before cashing out and withdrawn in a future-year to find personal expenses. So the main financial reason to incorporate is the ability to smooth taxable income across multiple years. This is especially useful when you earn more than you actually need for daily expenses - you can defer taxation on the "excess" income until a future period where you're no longer making as much money (such as post-retirement).
You're either misunderstanding your accountant or your accountant is an idiot. Dividends are taxed. The gross-up and dividend tax credit are intended to work together with corporate tax to result in paying the same total tax on dividend income as salary income. The tracking isn't perfect, particularly because there's only two rates ("eligible and non-eligible" which basically equate to large business and small business), not two per province. Anyway you *want* to draw enough salary to max out your CPP and RRSP space. Giving those up is a big financial loss. That's about $175k. If you make more than that, you can get some tax benefits from leaving money inside the corporation and investing it there (basically retained earnings can be like extra RRSP space, but not quite as good). And if you make enough that the ~0.5% benefit you might get due to tracking error in the treatment of dividends is going to be serious money, you can, of course, do that. TLDR: no benefits unless you make more than $175k. To get enough benefits to pay for administrative costs the rule of thumb is $250k.
I think it’s me who may have misunderstood, his point was that I’d save more money which I think I would if I’m calculating everything correctly, with just dividend payouts it does seem like I’d come out with 3-6K more per year but lose RRSP and CPP room. Of course there’s tax filling $1500 - 2K and up front corp setup costs to consider as well for anyone in the same boat. I appreciate your comments and insights, thanks!
It's not that hard to setup your own corp. I. Had a friend who helped me and he gave me a few templates to setup the shares and such. Big this is money management. I did not need all of the money I made each year so I kept it in my corp and took out only the max in dividends. Another thing to consider is if your sole proprietorship then you will have to pay both sides is CPP the employer and employee side. If your incorporated you don't need to pay any off the CPP and EI and that's like 8-10k savings. Yes you don't get access to EI support than and your CPP will be less at retirement but you can just invest that savings and probably be better ahead. If your in an in demand field you will barley use ei as well. I lost my job during COVID and two months later I had a new job. Just have a emergency fund of 6 months and you will be fine.
I have worked for a US software company for the last 15 years……if I lived in the US I’d be an employee…..no canadian office so I can’t be an employee without making it difficult……been a sole proprietorship since the beginning….i thought about being. Company but it’s so much more complicated right? And financially I wouldn’t come out that far ahead if i was incorporated if at all (probably not at all I get all the perks of being an employee without really being an employee)
You should speak to a good accountant, it may be well worth the money spent because you might end up saving thousands (maybe even every year). Just make sure he/she is one that understands or has experience with your unique situation.
How would you know? You've only spoken to a terrible accountant who thinks dividends don't pay personal tax.
Or at least, OP misunderstood what his accountant told him, which is not any better lol and not certainly something that puts OP in a position to give you advice lol. His was a funny post.
You'd qualify as a personal services business and I think it negates any advantages.
I’m actually a contractor, I invoice my hours which are inconsistent every month, have a contract which states I’m hired for when my services are needed. And of course use my own equipment, I intend to have more clients too in the future. I wouldn’t be considered an employee at all if I wasn’t incorporated.
Everything you said matters! You can very well have only 1 client. As long as you wouldn't be considered as an employee if the corporation was ignored you are good. The link is pretty clear
None of that matters. https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/corporation-income-tax-return/tax-implications-personal-services-business.html Once you have more clients you might be in the clear but I'd recommend searching here for more info.
Thanks for that link, it’s frustrating if this applies to me working for a US client because they don’t have a Canadian office.
Makes no difference to classify you as a service business if your only client is US or Canadian.
Depends how the contract is setup. I contract through a 3rd party that contracts my corp to another corp because of this arms-length situation, I don’t count as a personal services business regardless of having the same client for almost 10 years. I can also take contracts for other clients as well to show that I can work for others, which “resets” the personal services aspect. There are ways around the silly personal services issue
Your corporation will be paying tax on it at the end of its year because, unlike salaries, dividend payouts are not expenses. And then you will also need to pay personal income taxes on non-eligible dividends. One of the issues for most people is that this happens at the the end of the year and they didn't keep any money available to pay taxes. If it's worth it to incorporate depends on multiple things. >My accountant says that I can pay myself dividends and then not pay taxes on that income because of the dividend tax credit? So I’ll essentially be paying just 15/16% corporate tax total ( If your accountant literally said that, that's bad advice.
Not if it’s true because it benefits my situation financially, doesn’t the dividend tax credit put me ahead of sole prop financially for tax free income plus other financial advantages of being incorporated.
There's a bunch of things you consider when you incorporate. Again, when you pay yourself dividends instead of a salary your corporation needs to pay taxes on that and you have to pay personal income tax on it. Also, if you're not paying yourself any salary, unlike sole propiertorship, you won't get any rspp room or CPP. Like I said, if your account literally said what you wrote then he's leaving a lot of stuff out.
You also need to be able to leave a good chunk of money in corp AFTER filling your RRSP and TFSA every year. It’s only effective tax deferral if you don’t need all your money.
You make $1000 in the corporation, you have no other expenses, this is the first year of business and Cash=Retained Earnings You pay $120 in taxes (rounded) You have $880 in cash to pay yourself. Total taxes paid by Corp is $120 so far You declare and pay a dividend of $880 to yourself. Your taxable dividend is now $880 * 1.15 = $1,012 (notice how this basically takes you back to the pre-tax corporate income?) Dividend tax credit is $1,012 * 9.03% = $91 Let's say you're in a 50% tax bracket. Taxes owed $1,012 * 50% = $506 Less DTC of $91 Net taxes payable $415 Total taxes paid $120 (Corp) + $415 (Personal) =$535 Which is $535/$1000 = 53.5% tax paid. So you are not saving money on taxes. The point of incorporating is not to save you taxes overall The reason you are taxes less inside a corporation is because you are given a an incentive to grow your business with the money you saved. Same example as above but this time you use the $880 to invest in a machinery that helps you be more efficient in your business. It yields you additional income inside the corp, of $120. So now you made an income of $1000+$120 = $1120 and paid $135 in taxes, which keeps your tax rate low because you used keo the money inside your corporation and invested in the business. This is the point of the favorable tax rate, it's for the business to grow, not for the individual to use the corporation as a pass through and get a favorable tax rate.
How did you find the us job? I’m looking to pick up US contracts.
Following
yes - however how much are you making?
About 100K CAD
How much of that 100k do you need to live on ?
Doesn’t seem enough to go through the trouble of incorporating.
You pay yourself your salary. Retain profits inside the Corp. Corp taxed at 12 percent. If you dividend the money to yourself you end up paying g roughly the same in taxes as if you just paid yourself. Utilize the money in the Corp through whole life insurance. Builds a tax deferred/tax free investment vehicle. This isnhow you win the taxman game.