Incorporating?

[nzwasp]

I am not sure if this is the right subject to discuss this under but it seems to fit best.

I am currently a employee of a company in Calgary and I would like to become a contractor and incorporate. Does anyone know of some good resources on how to structure a company the best so that I pay out dividends instead of salary to myself every month or 2 months or whichever instead of paying both company tax and employee tax. Basically I want an explanation of how to best set this up to make the most of my hourly rate. I don't know any contractors well enough to have them explain it to me.

Also if anyone knows of a good website to read this - every one I find is very technical and is basically pulled straight from the Canadian Tax website.

edit:
I am not originally from Calgary or Canada and I don't know any good accountants

[lint]

go find a good accountant to advise you

[heavyfuel]

Unless you're making 500k yearly or more it's not worth it to incorporate, just a bunch of headaches and hassles if you ask me. Been there.

[02WhiteWs6]

If you incorporate, you will pay corporate tax, and personal tax on any dividends. your going to get taxed twice no matter what.

[bspot]

Originally posted by heavyfuel
Unless you're making 500k yearly or more it's not worth it to incorporate, just a bunch of headaches and hassles if you ask me. Been there.



Originally posted by 02WhiteWs6
If you incorporate, you will pay corporate tax, and personal tax on any dividends. your going to get taxed twice no matter what.


Ignore these people.

Paying personal taxes as an employee your in the high 30's for percentage of tax paid.

If you incorporate, worst case you're at 25% overall.

Small business tax in Alberta is 11% (Federal) + 3% (Provincial). 14%, plus you get to write a ton of stuff off, such as mortgage interest, mileage, sell your own computers and office supplies to yourself etc. You won't pay tax on any of that money.

If you're making less than $200,000 but more than $50,000 it's likely the most effective way to pay yourself is $15,000 salary, and the rest in dividends.

$15,000 in salary is roughly your personal deduction limit, so you'll pay near $0 tax on it.

For the dividends, just transfer money to your account whenever you need it. You're accountant will calculate your dividend at the end of the year and issue you a T5 for it. The dividend tax rate is really low up to about $33,0000. Over that, it climbs quite a bit, to a maximum of your normal 40% tax rate.

Another thing to keep in mind, you don't pay personal/dividend tax on what stays in the company. It's a great way to save, open a trading account in your company and put away some money. Then one day when you aren't using the company anymore you can start dumping money out $33,000 at a time while paying very little tax.

Lastly, don't pay anyone to incorporate you. Go to a registry and do it yourself. It's easy.

[nzwasp]

Thanks Bspot for the informative reply.

[C_Dave45]

Bspot, are you an accountant?

[silvercivicsir]

$15,000 k a year gives you little for RRSP contribution room. so you might be screwing yourself.

[nzwasp]

Originally posted by silvercivicsir
$15,000 k a year gives you little for RRSP contribution room. so you might be screwing yourself.

My unused amount is about 80k at the moment back from a couple of years where i subcontracted and didn't contribute because I was from another country (wasnt thinking i would retire in canada/didnt know i could contribute to rrsp).

[tenth]

Originally posted by nzwasp
Thanks Bspot for the informative reply.
Some of it was good and some of it questionable. Talk to an accountant, and get a full analysis. In particular, ask them about the taxation of personal services businesses and what that would mean to the cost/benefit of incorporating. I'm not an expert on small companies like this, but if the personal services business rules didn't apply, there could be a question of whether you run an active business (needed in order to qualify for the small business rates).

And before owning investments in that corporation (as was suggested), look into the taxation of corporate investment income and (1) whether there is a tax benefit to holding investments in the corporation, (2) what impact holding the investments might have on your ability to claim the lifetime capital gains exemption (if your business qualified).

[heavyfuel]

Originally posted by bspot







$15,000 in salary is roughly your personal deduction limit, so you'll pay near $0 tax on it.



You wanna please explain how in the blue flying fuck you're supposed to qualify for a mortgage claiming 15k personal?

[lint]

Originally posted by heavyfuel
You wanna please explain how in the blue flying fuck you're supposed to qualify for a mortgage claiming 15k personal?

1. not everyone needs to qualify for a mortgage
2. salary is only one component of total income

[BananaFob]

I would refer to the CRA guide for this as well:
http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-10e.pdf

Refer to step 2. If you are not sufficiently at an arms-length relationship with your employer, you won't have a tax advantage.

[tictactoe2004]

Anyone recommend a good accountant? I recently incorporated and need to find someone.

[guessboi]

+1 on Bspot's post.

Bang on the advantages of incorporating.

If you need a mortgage. get one first before you go on your own.

Regarding RRSP contribution room - you will be better off paying yourself dividends in the long term. Tons of advantages for being ltd or inc!

Remember tax laws are written by business people!

[Red@8]

Originally posted by tictactoe2004
Anyone recommend a good accountant? I recently incorporated and need to find someone.

PM sent!

[bspot]

Originally posted by heavyfuel


You wanna please explain how in the blue flying fuck you're supposed to qualify for a mortgage claiming 15k personal?

The process takes a little longer, but especially if you use the bank holding your corporate account, it's no problem. I had no problem getting qualified for a giant mortgage when I was house hunting 2 years ago.

[bspot]

Originally posted by C_Dave45
Bspot, are you an accountant?

Negative, I just did consulting work for about 6 years and also own a rental property within my corporation. I recently switched back to being an employee, so I've got a decent handle on the positive/negatives of each situation.



Originally posted by silvercivicsir
$15,000 k a year gives you little for RRSP contribution room. so you might be screwing yourself.

I didn't buy RRSP's when I was incorporated. I invested everything within my company, so now coming out of my consulting phase I've got a ton of RRSP room, and I'll slowly move my corporate investments over year after year (depending on the investment type).



Originally posted by tenth

Some of it was good and some of it questionable. Talk to an accountant, and get a full analysis. In particular, ask them about the taxation of personal services businesses and what that would mean to the cost/benefit of incorporating. I'm not an expert on small companies like this, but if the personal services business rules didn't apply, there could be a question of whether you run an active business (needed in order to qualify for the small business rates).

And before owning investments in that corporation (as was suggested), look into the taxation of corporate investment income and (1) whether there is a tax benefit to holding investments in the corporation, (2) what impact holding the investments might have on your ability to claim the lifetime capital gains exemption (if your business qualified).

For any traditional consulting job you qualify for the small business rates, I made the assumption that's what is going on here, as it's very common in Calgary.

For corporate capital gains you are again paying a very low tax rate. The math there works without the capital gains exemption.

If you wanted to invest in RRSPs you're seeing limited tax sheltering as there is no way you want to pay yourself fully in salary as you're throwing away a lot of money to tax.



Originally posted by BananaFob
I would refer to the CRA guide for this as well:
http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-10e.pdf

Refer to step 2. If you are not sufficiently at an arms-length relationship with your employer, you won't have a tax advantage.

They are really, really loose on this. I had the exact same job for 6 years with a company provided office, phone, computer and cell phone and this was still "arms length" enough, which it shouldn't be. If they ever start cracking down on that guideline, lots of companies/people are screwed because they'll owe a lot of back taxes.

[tenth]

Originally posted by bspot
For any traditional consulting job you qualify for the small business rates, I made the assumption that's what is going on here, as it's very common in Calgary.

...

They are really, really loose on this. I had the exact same job for 6 years with a company provided office, phone, computer and cell phone and this was still "arms length" enough, which it shouldn't be. If they ever start cracking down on that guideline, lots of companies/people are screwed because they'll owe a lot of back taxes.
So you were audited by the CRA on your relationship with your employer and passed the audit? And it was an audit, and not a review/inquiry which they are more lax on? Based on my basic reading of the personal services business rules, there's definitely some real risk with recommending incorporating and claiming the small business deduction in the OPs case.


For corporate capital gains you are again paying a very low tax rate. The math there works without the capital gains exemption.
What I was getting at is that investment income isn't taxed at the small business rates because it's passive income, and not active business income. Capital gains are only one component of investment income. Checkout Schedule 7 on your corporate tax return. Rates below:

http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/TaxRates/Income%20Tax%20Rates%20for%20CCPCs%202011%20and%202012.pdf

And regarding the capital gains exemption, the issue at hand is if you ever want to sell your corporation, if you want to use up your $750,000 in lifetime capital gains exemption, there are a certain requirements that must be met around the percentage of your assets that are actively used in the business over specific time-frames (i.e. not passive investments). This may or may not be a concern, but at the very least something that needs to be considered.

[bspot]

Originally posted by tenth

So you were audited by the CRA on your relationship with your employer and passed the audit? And it was an audit, and not a review/inquiry which they are more lax on? Based on my basic reading of the personal services business rules, there's definitely some real risk with recommending incorporating and claiming the small business deduction in the OPs case.


What I was getting at is that investment income isn't taxed at the small business rates because it's passive income, and not active business income. Capital gains are only one component of investment income. Checkout Schedule 7 on your corporate tax return. Rates below:

http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/TaxRates/Income%20Tax%20Rates%20for%20CCPCs%202011%20and%202012.pdf

And regarding the capital gains exemption, the issue at hand is if you ever want to sell your corporation, if you want to use up your $750,000 in lifetime capital gains exemption, there are a certain requirements that must be met around the percentage of your assets that are actively used in the business over specific time-frames (i.e. not passive investments). This may or may not be a concern, but at the very least something that needs to be considered.

Absolutely, again, I only refer to corporations for an individual, consulting professional, that are not ever sold, as they have no value beyond the individual consulting.

As for an audit, there are several O&G majors who have been reviewed and warned, I believe my 6 years was with one of them. I don't believe the situation would have made it past the audit, I don't believe the CRA would ever go to an audit unless there was direct refusal to remedy the situation. Several measures were taking to increase the employee/contractor distinction to avoid the millions in penalties/back taxes.

[heavyfuel]

Originally posted by bspot


The process takes a little longer, but especially if you use the bank holding your corporate account, it's no problem. I had no problem getting qualified for a giant mortgage when I was house hunting 2 years ago.

Ya well somebody's not telling me something then, I have near perfect credit and despite approx. 50-70k net after 6 years self employed I'm still shit outta luck.

I know 70k net isn't a shitload, but when I meet people that work at Safeway or Fountain Tire and have mortgages, it makes me wanna throw up. No way a tire monkey is making anywhere near 70k yet I'm the one getting the shaft.

[CUG]

This is a wicked thread. Good discussion in here.

[JDMsomething]

Originally posted by bspot






Ignore these people.

Paying personal taxes as an employee your in the high 30's for percentage of tax paid.

If you incorporate, worst case you're at 25% overall.

Small business tax in Alberta is 11% (Federal) + 3% (Provincial). 14%, plus you get to write a ton of stuff off, such as mortgage interest, mileage, sell your own computers and office supplies to yourself etc. You won't pay tax on any of that money.

If you're making less than $200,000 but more than $50,000 it's likely the most effective way to pay yourself is $15,000 salary, and the rest in dividends.

$15,000 in salary is roughly your personal deduction limit, so you'll pay near $0 tax on it.

For the dividends, just transfer money to your account whenever you need it. You're accountant will calculate your dividend at the end of the year and issue you a T5 for it. The dividend tax rate is really low up to about $33,0000. Over that, it climbs quite a bit, to a maximum of your normal 40% tax rate.

Another thing to keep in mind, you don't pay personal/dividend tax on what stays in the company. It's a great way to save, open a trading account in your company and put away some money. Then one day when you aren't using the company anymore you can start dumping money out $33,000 at a time while paying very little tax.

Lastly, don't pay anyone to incorporate you. Go to a registry and do it yourself. It's easy.

Glad you beat me to this. Also, most of your "expenses" can become business expenses.

This is how it basically works

Employed people:
Make money
Pay Taxes
Spend money

Business owners:
Make money
Spend money
then pay taxes

So, you end up paying less tax on your money. I would also like to add, if your business has good cash flow for a few years you can qualify for a mortgage, and just sign a personal guarantee that you will be good on it.

[Sugarphreak]

...

[Sugarphreak]

...

[garnet]

great info sugarphreak

the one thing i was never able to find/figure out, was at what point PSB doesn't apply

example: you work 95% of annual income for one client, 5% for other(s)

??



Originally posted by Sugarphreak
Not totally true, if you are a PSB only a handful of things can be written off (such as an accountant).


I could write up a page on this, but I will just cut to the chase for the sake of the OP.

OP.... if you are going to do a single contract with a single company, you are a PSB (personal services business). This means you can only write off extremely limited things, you cannot claim the small business deduction (which is the big tax saver) and honestly you are not saving all that much over just going staff (assuming you are getting a 20% difference between staff and contract).


Now if you go ahead and go contract, then claim the small business deduction (which is what 90% of people doing this do) and start writing things off, you are risking the CRA re-assessing you as a PSB.... then telling you that all of those things are in fact taxable benefits and forcing you to pay the additional cooperate tax on any cash your company has earned and not been taking out as salary. Then they are going to hit you with a high retroactive interest rate, and there is also a remote possibility of getting a penalty... which is 50% of what you owe.

Without the small business deduction it is 28% (PSB). Also you cannot write off your entire mortgage interest... you can however write of a percentage of that interest which belongs to your home office; mileage is also a tricky one because CRA says you must only use mileage between places of business. Which means driving from home to work is not applicable; another thing to keep in mind is they will also not accept that you use your car 100% for business if it is your only vehicle (same goes for things like cell phones). Coming back to PSB.... you cannot write off a home office or a car, cell phones or a computer if you are assessed as a PSB.



All of this said I am not telling people they can't go for it anyway. So many of the contracts I have seen just ignore the rules, be reasonable about their deductions and get away with it. I also personally have an incorporated company which does not claim PSB status... however, I have more than a single contract and go way out of my way to document everything in case I do get audited.

CRA has been cracking down the past 5 or 6 years, so it is a risk you need to consider if you fall into a PSB category.

[Sugarphreak]

..

[signal_11]

Originally posted by Sugarphreak
Not totally true, if you are a PSB only a handful of things can be written off (such as an accountant).


I could write up a page on this, but I will just cut to the chase for the sake of the OP.

OP.... if you are going to do a single contract with a single company, you are a PSB (personal services business). This means you can only write off extremely limited things, you cannot claim the small business deduction (which is the big tax saver) and honestly you are not saving all that much over just going staff (assuming you are getting a 20% difference between staff and contract).


Now if you go ahead and go contract, then claim the small business deduction (which is what 90% of people doing this do) and start writing things off, you are risking the CRA re-assessing you as a PSB.... then telling you that all of those things are in fact taxable benefits and forcing you to pay the additional cooperate tax on any cash your company has earned and not been taking out as salary. Then they are going to hit you with a high retroactive interest rate, and there is also a remote possibility of getting a penalty... which is 50% of what you owe.

Without the small business deduction it is 28% (PSB). Also you cannot write off your entire mortgage interest... you can however write of a percentage of that interest which belongs to your home office; mileage is also a tricky one because CRA says you must only use mileage between places of business. Which means driving from home to work is not applicable; another thing to keep in mind is they will also not accept that you use your car 100% for business if it is your only vehicle (same goes for things like cell phones). Coming back to PSB.... you cannot write off a home office or a car, cell phones or a computer if you are assessed as a PSB.



All of this said I am not telling people they can't go for it anyway. So many of the contracts I have seen just ignore the rules, be reasonable about their deductions and get away with it. I also personally have an incorporated company which does not claim PSB status... however, I have more than a single contract and go way out of my way to document everything in case I do get audited.

CRA has been cracking down the past 5 or 6 years, so it is a risk you need to consider if you fall into a PSB category.
He speaks the truth. Apparently, Calgary is on CRA's radar for contractors who abuse the system. Audits suck - I know people who played fast and loose with write offs and ended up with 6 figure back taxes and penalties to try to pay off.

[bspot]

Wow. I've never seen a PSB that clearly defined, there are a LOT of people in this city that could be very, very screwed.

[l/l/rX]

My friends parents told me to write up a contract and claim myself as a contractor under my numbered company rather than an employee, for various reasons that I cannot remember at the moment. Anyone have any more insight into this?

I'm meeting with them next week, where I can actually jot down all this information rather than trying to remember it all.

[garnet]

it doesn't quite work that way, the company hiring you will have a contract (or should) clearly defining your job and rate of pay

when you register an incorporation of your own, then you have the choice of paying yourself a salary, or simply by dividends, there are pros and cons to each

as has been discussed above, working for that one company, means you most likely are catagorized as PSB, and so you need to structure your business accordingly



Originally posted by l/l/rX
My friends parents told me to write up a contract and claim myself as a contractor under my numbered company rather than an employee, for various reasons that I cannot remember at the moment. Anyone have any more insight into this?

I'm meeting with them next week, where I can actually jot down all this information rather than trying to remember it all.

[UndrgroundRider]

One additional benefit to incorporating that hasn't been mentioned yet is that you can avoid paying CPP if you pay yourself with dividends. If you'd rather invest that money yourself instead of letting the government play with it, you can save yourself 3-4k (since you pay both ends as a business owner or sole proprietor).

And one huge downside that really hasn't been talked about is the complexity increase in doing your taxes each year. As a corporation you now have to file corporate taxes, prepare T4's and T5's, in addition to your normal personal income tax.

On the topic of dividends nobody really gave any concrete information on how the taxes actually work out. Assuming you are the business owner of a small business and paying yourself with dividends, then your overall marginal tax rate is better than if you were paying yourself T4 income, up to the end of the second tax bracket (22%).

This makes sense, because the dividend tax credit you receive is fixed and has nothing to do with what tax bracket the income is in. As the tax rate increases, obviously paying yourself with dividends becomes less tax effective since the tax credit does not also increase proportionately.

That said, the dividend tax credit is designed to make the overall marginal tax work out the same as if you paid yourself with T4's and were in the 22% tax bracket. This means on your first 40k or so (which is in the 15% bracket) you actually save quite a bit of money. Add that to the fact that you don't have to pay CPP on that income, and you have some real savings.

Here's a quick formula to work out the marginal tax rate you will pay on income in a certain tax bracket:

Definitions:
Taxable Dividend Income = TDI
Tax Bracket Rate = TBR
Tax Gross = TG
Tax Payable = TP
Income = INC
MTR = Marginal Tax Rate (percentage of income that must be paid as tax)

; This is the gross-up applied to small-business non-eligible dividends
TDI = INC * 1.25

; Gross tax is grossed-up dividend times the tax bracket rate
TG = TDI * TBR

; Tax payable is the tax gross minus the dividend tax credit (13.3333% of grossed up dividend)
TP = TG - (TDI * 0.133333)

; Substitution of TG
TP = (TDI * TBR) - (TDI * 0.133333)

; Substitution of TDI
TP = (INC * 1.25 * TBR) - (INC * 1.25 * 0.133333)

; Factor out (INC * 1.25)
TP = (INC * 1.25)(TBR - 0.133333)

; Marginal tax rate is Tax Payable / Income plus 11% corporate tax
MTR = ((INC * 1.25)(TBR - 0.133333))/INC + 0.11

; Cancel out and expand
MTR = 1.25 * TBR - 0.16666625 + 0.11


Using this formula you can work out where the tax bracket rate starts to favour T4 income over dividends:

MTR > TBR

1.25 * TBR - 0.16666626 + 0.11 > TBR
1.25 * TBR > TBR + 0.05666625
0.25 TBR > 0.05666625
TBR > 0.226665

Which means the Marginal Tax Rate (on dividends) is greater than the Tax Bracket Rate when the Tax Bracket Rate is greater than 22.6665%.

Keep in mind this isn't a perfect formula, since it doesn't account for provincial tax or how your tax is blended across different tax brackets based on the amount of income.

[Euro838]

Correct me if I am wrong but one of the ways around the PSB thing is to go through a 3rd party agency. I believe this is why a lot of large corporations will not allow people to directly contract to them and have to go through one of their preferred vendors i.e. 3rd party agency.

These agencies provide resources to multiple clients/corporations so I believe the CRA would not be able to know (without asking or some sort of audit) which client(s) you are doing work for. You would always be billing the agency and they could be having you work for multiple clients.

[garnet]

more great info...maybe this should become a sticky?


there are a few things regarding dividends that i've read/recorded below, which people may want to weigh in on;

- that if your company earns active income that is less than the small business limit ($400,000 for taxation years beginning after 2006), it’s usually better to declare dividends, the payment of which can offset the shareholder loan

- if you draw funds from your corporation throughout the year for personal expenses, you should determine whether these amounts will be characterized as salary or dividends before year-end. Otherwise, the funds withdrawn could be treated as a shareholder loan, unless certain conditions are met. A shareholder loan would be included in your income without benefit of the dividend tax credit, and without being deductible to the corporation as salary. Also, it would not be considered earned income to you for RRSP purposes


here is a good 1 page article showing benefit of dividends vs salary, in under $500K example

http://www.theglobeandmail.com/report-on-business/small-business/exit/taxation/two-scenarios-salary-versus-dividends/article1774925/

another good article to read;
http://businessplanhut.com/drawings-and-dividends-budget

a key note, is that while salary paid to yourself (and any shareholders ie. spouse) is considered an expense, and deducted from the companies total taxable income, a dividend paid out is not considered an expense




Originally posted by UndrgroundRider
One additional benefit to incorporating that hasn't been mentioned yet is that you can avoid paying CPP if you pay yourself with dividends. If you'd rather invest that money yourself instead of letting the government play with it, you can save yourself 3-4k (since you pay both ends as a business owner or sole proprietor).

And one huge downside that really hasn't been talked about is the complexity increase in doing your taxes each year. As a corporation you now have to file corporate taxes, prepare T4's and T5's, in addition to your normal personal income tax.

On the topic of dividends nobody really gave any concrete information on how the taxes actually work out. Assuming you are the business owner of a small business and paying yourself with dividends, then your overall marginal tax rate is better than if you were paying yourself T4 income, up to the end of the second tax bracket (22%).

This makes sense, because the dividend tax credit you receive is fixed and has nothing to do with what tax bracket the income is in. As the tax rate increases, obviously paying yourself with dividends becomes less tax effective since the tax credit does not also increase proportionately.

That said, the dividend tax credit is designed to make the overall marginal tax work out the same as if you paid yourself with T4's and were in the 22% tax bracket. This means on your first 40k or so (which is in the 15% bracket) you actually save quite a bit of money. Add that to the fact that you don't have to pay CPP on that income, and you have some real savings.

Here's a quick formula to work out the marginal tax rate you will pay on income in a certain tax bracket:

Definitions:
Taxable Dividend Income = TDI
Tax Bracket Rate = TBR
Tax Gross = TG
Tax Payable = TP
Income = INC
MTR = Marginal Tax Rate (percentage of income that must be paid as tax)

; This is the gross-up applied to small-business non-eligible dividends
TDI = INC * 1.25

; Gross tax is grossed-up dividend times the tax bracket rate
TG = TDI * TBR

; Tax payable is the tax gross minus the dividend tax credit (13.3333% of grossed up dividend)
TP = TG - (TDI * 0.133333)

; Substitution of TG
TP = (TDI * TBR) - (TDI * 0.133333)

; Substitution of TDI
TP = (INC * 1.25 * TBR) - (INC * 1.25 * 0.133333)

; Factor out (INC * 1.25)
TP = (INC * 1.25)(TBR - 0.133333)

; Marginal tax rate is Tax Payable / Income plus 11% corporate tax
MTR = ((INC * 1.25)(TBR - 0.133333))/INC + 0.11

; Cancel out and expand
MTR = 1.25 * TBR - 0.16666625 + 0.11


Using this formula you can work out where the tax bracket rate starts to favour T4 income over dividends:

MTR > TBR

1.25 * TBR - 0.16666626 + 0.11 > TBR
1.25 * TBR > TBR + 0.05666625
0.25 TBR > 0.05666625
TBR > 0.226665

Which means the Tax Bracket Rate is greater than the Marginal Tax Bracket Rate (for paying with dividends) when the Tax Bracket Rate is greater than 22.6665%.

Keep in mind this isn't a perfect formula, since it doesn't account for provincial tax or how your tax is blended across different tax brackets based on the amount of income.

[garnet]

some companies do hiring only though employment/placement agencies, but that may more to do with an individual human resouces person, or maybe is a company general rule?



Originally posted by Euro838
Correct me if I am wrong but one of the ways around the PSB thing is to go through a 3rd party agency. I believe this is why a lot of large corporations will not allow people to directly contract to them and have to go through one of their preferred vendors i.e. 3rd party agency.

These agencies provide resources to multiple clients/corporations so I believe the CRA would not be able to know (without asking or some sort of audit) which client(s) you are doing work for. You would always be billing the agency and they could be having you work for multiple clients.

[garnet]

can someone expand further on Dividend tax credits?
trying to figure it out more clearly :)

http://www.taxtips.ca/dtc/smallbusdtc.htm

Non-eligible (small business) dividend tax credit
Non-eligible, or ordinary, dividends are any dividends issued by a Canadian corporation, public or private, which are not eligible for the enhanced dividend tax credit.

The non-eligible dividend tax credit rate is used for dividends received from Canadian-controlled private corporations (CCPCs), to the extent that their income is subject to tax at the small business rate. A portion of dividends from large public corporations may also be classified as not being eligible for the enhanced dividend tax credit and would therefore be classified as non-eligible dividends.

When an individual receives non-eligible dividends, the amount included in income is 125% of the actual dividend. The additional 25% is referred to as the gross-up.

For a single individual with no income other than taxable Canadian dividends which are eligible for the small business dividend tax credit, approximately $40,600 can be earned in 2009 before any federal taxes are payable. For the maximum amounts that can be earned federally and in each province for 2009, see the table in the article on alternative minimum tax.

[UndrgroundRider]

So you already know that corporations pay tax on dividends, since the money technically comes from retained earnings and may be from previous years income. In most cases corporations don't even know they're going to issue the dividends until long after the taxes have been paid on it.

The idea behind the tax credit is to offset the taxes already paid on the money if that money is subsequently issued as a dividend to a shareholder. The problem then comes into play that the corporate tax rate is different for different companies.

To solve the issue the dividend tax credit is divided into two different categories (eligible and non-eligible), one for normal "big" businesses, and one for small businesses that pay the small business tax rate on their corporate income. With these two categories the tax credit is setup to almost exactly offset the tax paid at the corporate level.

In simple terms, any dividends from a business that is taxed at the small business rate are non-eligible. And more specifically, dividends from a business that is taxed at the general corporate rate are eligible.

[garnet]

i'm thinking more specifically to small inc/ltd., and how/where to place this on paper (return)?


Originally posted by UndrgroundRider
So you already know that corporations pay tax on dividends, since the money technically comes from retained earnings and may be from previous years income. In most cases corporations don't even know they're going to issue the dividends until long after the taxes have been paid on it.

The idea behind the tax credit is to offset the taxes already paid on the money if that money is subsequently issued as a dividend to a shareholder. The problem then comes into play that the corporate tax rate is different for different companies.

To solve the issue the dividend tax credit is divided into two different categories (eligible and non-eligible), one for normal "big" businesses, and one for small businesses that pay the small business tax rate on their corporate income. With these two categories the tax credit is setup to almost exactly offset the tax paid at the corporate level.

In simple terms, any dividends from a business that is taxed at the small business rate are non-eligible. And more specifically, dividends from a business that is taxed at the general corporate rate are eligible.

[UndrgroundRider]

The corporation needs to complete and file a T5. This reports to the CRA and to the shareholder the amount of dividends they received, the dividend tax credits available and whether or not they are eligible or non-eligible funds.

The shareholder then reports this income on line 120 and 121 of their T1, and the tax credit on line 41 of schedule 1.

[garnet]

awesome....thanks
this was absent in a certain so-called "accountant" filing for me :banghead:


Originally posted by UndrgroundRider
...and the tax credit on line 41 of schedule 1.

[heavyfuel]

Originally posted by UndrgroundRider
The corporation needs to complete and file a T5. This reports to the CRA and to the shareholder the amount of dividends they received, the dividend tax credits available and whether or not they are eligible or non-eligible funds.

The shareholder then reports this income on line 120 and 121 of their T1, and the tax credit on line 41 of schedule 1.

Better be making a mil+ yearly to involve such complicated bullshit

[Big Daddy G]

This is probably a good place to ask this.

I'm looking at potentially incorporating, and wanted to get a referral or two for an accountant.

PM if you have a good one!

thanks

[whatthe]

I can likely set myself up to not be PSB, but I would like to talk someone experienced as to what steps need to be taken. Compare it to what I want to accomplish and see if it is worth it. Any recommendations would be appreciated as well.

[Sugarphreak]

...

[garnet]

sounds like someone trying to take advantage
in my first year, i claimed something like $13K in tools, equipment and supplies/consumables for work only use
but then it was getting started, so after everything, i ended up owing only $700...but i never got an audit (flagged), then my next 2 years were much lower, so i guess they expected that to be at my start

i could be wrong, but i thought i read somewhere that only in the first 3 years/periods, that a business could claim a loss consecutively, then only every so often afterwards
it makes sense to not be allowed to claim a loss every year, or frequently for your small business

i remember being afraid of being audited should i claim a loss (on paper) in my first year, so i actually left some expenses unclaimed, just so i would owe a little bit LOL

[UndrgroundRider]

Originally posted by garnet
sounds like someone trying to take advantage
in my first year, i claimed something like $13K in tools, equipment and supplies/consumables for work only use
but then it was getting started, so after everything, i ended up owing only $700...but i never got an audit (flagged), then my next 2 years were much lower, so i guess they expected that to be at my start

i could be wrong, but i thought i read somewhere that only in the first 3 years/periods, that a business could claim a loss consecutively, then only every so often afterwards
it makes sense to not be allowed to claim a loss every year, or frequently for your small business

i remember being afraid of being audited should i claim a loss (on paper) in my first year, so i actually left some expenses unclaimed, just so i would owe a little bit LOL

The CRA has certain criteria that flags individuals/businesses for audits. I assume this is probably a scoring system based on a weighting of multiple factors. You don't have to worry about this if you have a solid paper trail and everything is above board. A professional accountant can help you with this.

[l/l/rX]

Anyone have any recommendations for insurance providers? I'm looking for $2mill in liability. I would like to get a quote first.

[signal_11]

Originally posted by l/l/rX
Anyone have any recommendations for insurance providers? I'm looking for $2mill in liability. I would like to get a quote first.
Encon is small-business friendly:
http://www.encon.ca/Pages/EnconWelcome.aspx

[b_t]

for what its worth, I just switched to being a contractor and my nominal tax rate ended up being slightly higher than it was when I was an employee. unless I am really diligent with my expenses, I will end up paying more taxes - and in the end I will have to pay most of the difference to my accountant anyway, and considering the whole thing is a ten thousand times bigger pain in the ass than just getting paid, I wish I had not gone this route.

[bspot]

Originally posted by b_t
for what its worth, I just switched to being a contractor and my nominal tax rate ended up being slightly higher than it was when I was an employee. unless I am really diligent with my expenses, I will end up paying more taxes - and in the end I will have to pay most of the difference to my accountant anyway, and considering the whole thing is a ten thousand times bigger pain in the ass than just getting paid, I wish I had not gone this route.

You're doing it wrong, or making several hundred thousand a year.

[Sugarphreak]

...

[b_t]

Originally posted by bspot


You're doing it wrong, or making several hundred thousand a year.

I'm doing it in a way that gives me absolutely nothing to worry about in case I was ever audited.

If I played fast and loose with the rules and claimed things I am not really entitled to (ie. small business credit, writing off housing expenses even though I have no use for a home office, vehicle expenses) I could easily save a ton on my taxes, but then if I got audited I would be boned.

FWIW the stuff posted about salary vs. dividends was pretty valuable, so that at least will save me a lot on CPP contributions. So that's not bad.