Sorry for being such a kill-joy with this topic, but I need some clarification...
I've doing some tax planning research (...yah, my life is "real" exciting ! ), and I've found something which sounds too good to be true...
As some of you who've been following my job saga, you'll know that after being laid off from Nortel, I picked-up contract work with the Government.
In order to get the job, I had to get incorporated. So now "my company" pays me a salary or dividends.
From what I can find, there is a Dividend tax credit for personal income tax which effectively makes your tax rate 0% !!! ??? (...for the first $40,000 anyways ).
Ie. I can pay myself a $40,000 dividend and pay NO tax on it. (...of course, the "company" has to pay a corporate tax rate of 16% on the pre-dividend amount, but still... )
So if my math is good... My company makes $50,000. I pay myself NO salary so my "corporate" profit is $50,000. I pay 16% corporate tax (=$8000). I'm left with $42,000 which I pay myself as a dividend and pay NO personal tax on that amount .
Is that right ??? Can my net tax rate be only 16%.
Better still, if I make my wife a half-owner of my company, could I pay her a $40,000 dividend too ?
Sounds right to me. I'm no expert although my sister works @ Deloitte & Touche so might know.
Related to Nortel, a buddy used to work as a contractor, but he was smart enough to incorporate (against Nortel policies) - so the agency paid his company, and he mentioned the same concept - as in 16% tax rate. He also, mentioned he hired his wife as an admin assistant
I operate my business the same way, although haven't bothered with dividends for quite a few years. Another nice thing about it is most business related expenses are deductible, including computer equipment, office supplies, internet service, phone service, etc. I also deduct a percentage of my home expenses since it's a home office. So none of this stuff has to come from personal income. And... all of the GST paid out for business expenses is refundable.
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Sold stocks on Bay Street for many years and helped guys with tax avoidance.. you are out of luck, unless they have completely revised the tax code ( Doubt it)'. Check dividend gross up for tax calcs. However if this is a loophole, wont be open for long, so take advatage of it, guarantee it will be closed next year.
Also, if you are paid a dividend, you must have a significant enough investment to warrant that dividend. For example, I invest 100$, I get a 40,000 dividend, does not make any sense. I invest 400,000, i get a 40,000 dividend, it still stinks. A dividend is a small percentage income to hold the investment for long term, Revenue Canada are no idiots by a long shot, and will be onto this, guaranteed.
Ya, you definitely missed something. Talk to your accountant (I can recommend a good one).
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Sold stocks on Bay Street for many years and helped guys with tax avoidance.. you are out of luck, unless they have completely revised the tax code ( Doubt it)'. Check dividend gross up for tax calcs. However if this is a loophole, wont be open for long, so take advatage of it, guarantee it will be closed next year.
I've talked to several other people at work who are in the same situation as me, and they are the ones who told me about this.
3 different people essentially told me the same thing...
I can't imagine it's a loophole since the web site I pointed to clearly shows a yearly marginal rate calculation up to 2012.
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Also, if you are paid a dividend, you must have a significant enough investment to warrant that dividend. For example, I invest 100$, I get a 40,000 dividend, does not make any sense.
While I understand what you are saying, I don't think that's how it works. I'm not buying shares in a Company, I own the entire company. If Bell makes $3M in profit and has 3M shares outstanding, each share makes $1 in profit ...which may or may not be offered as a Dividend by Bell.
If I make $40,000 in profit and I own all the shares, I can pay myself the full amount in Dividend if I want. I'm quite sure this is totally legit.
As far as the dividend payment goes, it hasn't worked that way for me for tax purposes. I hope my accountant is on the ball...
Regarding "Employing" the spouse; be careful with that one. Under audit, if they find he/she's on the payroll/board solely for tax purposes, with no added value to the corp., you may find yourself owing back taxes - but, professional advice on that one would be prudent.
Also, having all your eggs in one basket (both spouses as directors), could possibly be dangerous should you find yourself on the wrong side of the fence with RevCan or in litigation with a customer etc. Again, proper, qualified advice is certainly the order of the day. Just something else to think about...
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Sold stocks on Bay Street for many years and helped guys with tax avoidance.. you are out of luck, unless they have completely revised the tax code ( Doubt it)'. Check dividend gross up for tax calcs. However if this is a loophole, wont be open for long, so take advatage of it, guarantee it will be closed next year.
Also, if you are paid a dividend, you must have a significant enough investment to warrant that dividend. For example, I invest 100$, I get a 40,000 dividend, does not make any sense. I invest 400,000, i get a 40,000 dividend, it still stinks. A dividend is a small percentage income to hold the investment for long term, Revenue Canada are no idiots by a long shot, and will be onto this, guaranteed.
They modified the rules back in 2006 or 2007 and then again last year with the latter changes taking effect in 2010.
The rules don't provide the big advantage that Steph's references seem to suggest. It can be advantageous, but it is typically not THAT advantageous. The entire point of the system (e.g. the gross-up and dividend tax credit) is to ensure that there is actually little difference between paying a salary or paying a dividend out of retained earnings (this was one of the first questions I asked a decade ago when I set up my current company). The so-called negative marginal rates don't really come into play in Steph's situation because negative tax amounts can only be used to offset taxes payable.
It is important to recognize that using dividends as a vehicle for distributing revenue has other effects on the tax situation -- for example, other tax credits may be entirely eliminated (say, no claiming anything for the kids or CPP or RRSPs).
Also, don't forget provincial taxes (in Ontario, IIRC, that will run between 5.5% and 14%, depending on corporate income).
Steph -- you really need to run the numbers through a tax program or talk to a tax accountant. My understanding has always been that it is not the big boon that some folks say it is (otherwise EVERYBODY would do it).
EDIT: I haven't had enough coffee yet, but if I look at things roughly -- you will be paying at least 21.5% on the corporate income, which is below the 24% marginal rate for income at that level. There may be an advantage there, but it would depend on your other income sources and level, as well as other credits, which may no longer be available.
EDIT2: Brain is not engaged today ... the marginal rate for the first $37K is 21%, then the 24% kicks in.
CAVEAT: I am definitely not an expert and have to pay somebody to figure out the details for me (which, depending on circumstances, can cost as much as the potential savings!)
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As far as the dividend payment goes, it hasn't worked that way for me for tax purposes. I hope my accountant is on the ball...
Regarding "Employing" the spouse; be careful with that one. Under audit, if they find he/she's on the payroll/board solely for tax purposes, with no added value to the corp., you may find yourself owing back taxes - but, professional advice on that one would be prudent.
Also, having all your eggs in one basket (both spouses as directors), could possibly be dangerous should you find yourself on the wrong side of the fence with RevCan or in litigation with a customer etc. Again, proper, qualified advice is certainly the order of the day. Just something else to think about...
I think what Steph is proposing is legit. I recall using that approach with my accountant for many years before we restructure the company.
In terms of the spouse situation, he is not employing his spouse. In his case, she would be an owner of the company and he is free to issue dividends to her.
In terms of both husband and wife owning the company, I think you are correct and Steph should investigate this further.
As others have said, best to see an accountant. A smart accountant will suggest issuing several classes of shares so you have flexibility for future payments.
I think this discussion has demonstrated you are on the right path, but none of us are qualified to offer absolute guidance. Best to call on the experts.
Steph -- you really need to run the numbers through a tax program or talk to a tax accountant. My understanding has always been that it is not the big boon that some folks say it is (otherwise EVERYBODY would do it).
I agree he needs to talk to an expert, but just because everybody isn't doing it, doesn't mean it doesn't work.
Not everyone can do it. If I recall correctly, you have to have more than one stream of income -- I could be wrong here -- so, for example, an employee cannot simply start collecting consulting revenue from their employeer and claim they are a company. Again, I am no expert, but I do recall that being an important consideration.
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