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Thread: Help with incorporating

  1. #1
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    Default Help with incorporating

    Need some help understanding how incorporating works as a potential employer wants to pay under this arrangement.

    My understanding is that I incorporate company xyz inc and then my employer pays that company. Company xyz then pays me as an individual. Whatever my corporation pays me is considered to be personal income and whatever goes into the company is taxed under corporate tax structure.

    The company can then write off certain things, part of my house, lease payment on a car, computers etc... My understanding is that I can pay myself just enough to cover living expenses and leave the rest in the company, which would put me in a low income bracket for personal tax and the balance that stays in the company would be taxed at the lower corporate rate.

    I wouldn't be eligible for EI or CPP, but could draw down from the company balance if I get laid off. I was also told that I need to be able to show income from more than one contract each year or I run the risk of being declared a PSB in the event of an audit?

    I plan on getting an accountant as I don't want to piss of the CRA, but wanted a bit more info before I do anything.

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    I would probably just flow all of your income through to payroll. If you are using terms like "employer" then likely the CRA would say that too. If they consider you a PSB (and it sounds to me like they probably would), then any money you leave in the corp is going to get taxed more than your personal income. The CRA really doesn't like the type of arrangement you are considering.

    - You can't really write off "part of your house". You can deduct certain expenses generated from your house, but there are rules here that are worth reading.

    - Don't bother with leasing a car through the corporation. The CRA doesn't like this either, and it doesn't end up being an advantage. Just bill your corporation on a per-km basis and make it easy. The tax man will like you, too.

    - Computers and such are a good advantage of this setip.

    - If you pay yourself a salary, you will need to remit for EI/CPP. You will also get an RRSP contribution room...if you are into that type of thing.

    - The rules to avoid being called a PSB are a bit grey, and worth reading. But suffice to say it is more than "just getting one more contract". Your mix of revenue is also important (as a percentage).

    - If you are an IT contractor, then good luck. The CRA literally came up with the PSB rules to address IT workers doing this.

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    Buster nailed it.

    Sounds like the rest you're aware of.

    The house deductions are a percentage of your total home. For example, your office is 100sq.ft compared to the total 1000sq.ft. Here you're eligible to deduct 10% of your associated expenses like electricity, phone if not dedicated, heat etc.
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    Originally posted by Buster


    - You can't really write off "part of your house". You can deduct certain expenses generated from your house, but there are rules here that are worth reading.

    - Don't bother with leasing a car through the corporation. The CRA doesn't like this either, and it doesn't end up being an advantage.

    - If you pay yourself a salary, you will need to remit for EI/CPP.

    - The rules to avoid being called a PSB are a bit grey, and worth reading. But suffice to say it is more than "just getting one more contract". Your mix of revenue is also important (as a percentage).

    - If you are an IT contractor, then good luck. The CRA literally came up with the PSB rules to address IT workers doing this.
    That's funny, I know a ton of IT contractors doing exactly this. A couple who are really PSBs waiting to get busted, and some building a legit corporation who have been fine for a decade and will be fine for a decade to come, audit or no audit.

    As for the PSB thing, know the four-fold test inside out and backwards and how it applies to your business. Structure yourself so you can legitimately pass all aspects. As a self employed contractor, you can be EI exempt.

    If your car is cheaper than the gov't accepted rate to run, keep it personally and bill your company for legit business mileage. If it's more expensive to run (big diesel truck etc) and/or you use it entirely for work, let the company own it. Track personal miles and your acct can have your corp charge you a taxable benefit for that usage.

    And you absolutely can write off a portion of your home that is legitimately used for your business. Have your corporation pay you a reasonable amount of rent for the space.

    Don't try to fuck the CRA, as they fuck back and fuck hard, but don't be afraid to take genuine deductions you're entitled to. Most importantly, get a good accountant who you've been personally referred to by another business owner and take their advice, not mine or Busters.
    Last edited by carson blocks; 03-07-2017 at 10:00 PM.

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    I think the four fold test has expanded to be more than four fold.

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    Originally posted by Buster
    I think the four fold test has expanded to be more than four fold.
    It is, and judgement after appeals can often go either way. I have a detailed post a while back on the precedent case where it was changed from the original test (well not changed, more like clarified with additional requirements)

    Making a pile of deductions are how you get yourself flagged and audited, the golden rule is keep it under 10K and they will basically ignore you.

    Deductions are such a trivial aspect of the tax savings anyway, the main reason you don't want to be assessed as a PSB is so you can claim the small business deduction, then to really take advantage of the deduction, you can take your income in dividends. That also allows you to avoid CPP and EI.

    Originally posted by Buster
    - You can't really write off "part of your house". You can deduct certain expenses generated from your house, but there are rules here that are worth reading.
    You can technically write off the mortgage interest.... so if your office is 5% of the space of your house, you can write off 5% of the mortgage interest (not to be confused with your mortgage payment). Similar rules for home phones, electricity, gas... etc.

    I don't personally, it is too much to track and it can draw unwanted attention. The only thing I really write off is my tax software, company computers/printers, and account fees. The only exception is I did lease a vehicle through my company for a few years. By keeping it simple, I also save on having to use a tax accountant... which totals more than a huge pile of deductions.
    Last edited by Sugarphreak; 03-10-2017 at 12:52 PM.

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    There have been rumours the federal govt is looking at tracking home office deductions. Possibly taxed on the % deemed office space when selling your principal residence.

    Just rumours though...
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