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    Question Incorporating?

    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
    Last edited by nzwasp; 05-26-2011 at 01:18 PM.

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    go find a good accountant to advise you
    heloc that shit

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    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.

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

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    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.

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    Thanks Bspot for the informative reply.

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    Bspot, are you an accountant?

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

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    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).

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    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).

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    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?
    Last edited by heavyfuel; 05-26-2011 at 05:50 PM.

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    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
    heloc that shit

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    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.

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    Anyone recommend a good accountant? I recently incorporated and need to find someone.
    Click here to check out my racing sim...

    Originally posted by GQBalla
    tictactoe2004 you are scary

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    +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!
    Insurance Pro

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

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    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.

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    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.

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    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/IssuesAndI...and%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.

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    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/IssuesAndI...and%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.

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