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 ?

This sounds too good to be true.

Anyone out there know this stuff... ?

Do tell...

Thanks,
Steph

BTW,

Here is some of the info I found

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

I love the table at the bottom of the page that shows that your net marginal tax rate
for dividends under $40,000 is actually  -4.28%  !!!

I even tried plugging numbers in QuickTax pro and it seems to check out.  wow...

Steph

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.

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).

Quoted from gjd

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.

Quoted Text

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.

Quoted from jonny_eh

Ya, you definitely missed something. Talk to your accountant (I can recommend a good one).

Yes, for sure I will talk to an accountant...

I was just hoping to find one on this board ....  


Steph

Yes, for sure I will talk to an accountant...

I was just hoping to find one on this board ....  


Steph
[/quote]

Let us know...Very interresting perspective.

Claude.

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...

Quoted from gjd

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!)

Quoted from MarkToo

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.

Cheers,
Duane  

Quoted from CheffoJeffo

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.

Duane

I pity you steph been there done never again will i ever incorporate.
You will need accountant for you year end for him to submit you tax because you are not allowed to do this your self.

Quoted from ethous

You will need accountant for you year end for him to submit you tax because you are not allowed to do this your self.

???

As Owner/President/Treasurer/Accountant/Janitor of the company,
I'm entirely eligible to submit corporate taxes (T2 form) myself.

There is no legal precendent to prevent me from submitting my own corporate tax.

Of course, having a certified accountant would probably eliminate some headaches,
but I'm too cheap to pay $800 for some guy to do what I could do in 2 hrs....

Steph
CEO

Quoted from Steph

Of course, having a certified accountant would probably eliminate some headaches,
but I'm too cheap to pay $800 for some guy to do what I could do in 2 hrs....

I pay alot more than $800. One year things were tight and I had the same brain fart as you. "I can do this" and I did, but I forgot an important declaration which impacted the next year tax plan costing me alot of money enough. Enough in fact to cover his outrageous fees. Since then, I have recognized the value the accountant brings.

Good luck, but I think you are crazy to go it alone.

Duane

Quoted from TwilightZone

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.  

I think you are perhaps confusing the business tax write-offs rules.

The multiple income streams is important to show that you are not
in an employee/employer relationship.

[ An employee/employer relationship is when a consultant
assumes essentially the role of a full-time employee,
which, clearly is my case here... ]

These rules are to prevent a consultant who works on the same customer site
(ie. has an office there..) to claim business write-offs that a
full-time employee could not.

For instance, some consultants will try to write-off their car
expenses to drive into work. You can not do this if you always
go to the same office.

(... a plumber for instance can write off travel expenses
because he goes to multiple sites for work,
but not the white-collar consultant who always goes to the same office )

That said, if I'm a "free-lance" consultant who has several clients
and have to traval to various locations (say, a web designer),
THEN I can write that off.

That's where the multiple streams of income comes in.
It's to prove that you are not in an employee/employer relationship
and therefore have more flexibility to write off expenses.
(...which is not my goal here... )


Steph

Sorry in Quebec that's a no no trust me almost cost me 60k because of that if you are owner president ect you cannot file business income tax at end of year only a ca can do this.
Trust me i tried and got a major slap on the hand then was lucky they gave me a chance i went to see accountant and cost me 650$ for all paper work.
Then when i tried to close company down in Quebec easier said then done took 5 years to close the dam thing they kept loosing paper work saying you did not pay taxes for this period then send them a fax saying you did 6 months later they do it again but for another period said info again.
Then they had a server crash i had to re send all my paper work because they lost it.
Never again specially for fing Quebec.

Quoted from Steph

???

As Owner/President/Treasurer/Accountant/Janitor of the company,
I'm entirely eligible to submit corporate taxes (T2 form) myself.

There is no legal precendent to prevent me from submitting my own corporate tax.

Of course, having a certified accountant would probably eliminate some headaches,
but I'm too cheap to pay $800 for some guy to do what I could do in 2 hrs....

Steph
CEO

My experience is outdated, for sure( I left in 2001 after the market imploded), and this potential loophole applies to me as well. I am going to investigate it for sure.

Just out of curiosity, if you pay yourself a dividend of 40,000, the corp pays 800$ tax, or you as a person receiving the dividend pay 800 tax?

In the past, people were avoiding taxes in all kinds of crazy ways, that they have since eliminated, but with Rev Can it is also a cat and mouse type of situation. People are always finding unique ways to lower their tax burden, especially corporations, but just be careful, and budget for the eventuality that it is reversed.

Quoted from MarkToo

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...

My dividend thing assumes not other source of personal income.

From what I understand, it's a credit you get from the Dividend
which basically reduces the amount of tax owing ON THE DIVIDEND.

If you have other sources of income, these will be still be taxed accordingly

Quoted Text

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.

Yes, I'm very leery of that practice (employing a spouse) ...
I know people who pay their spouses $30,000yr as "file clerks".

I know this is HUGE red flag for REV CAN,
and it is NOT what I want to do.

I basically want to give my wife part ownership of the company
(... say 49% of non-voting shares ), so that she has no
control of the compamy but can be given some dividends.

This would obviously require some notarized paperwork,
but perhaps worth it in the end.

Just speculating.

S.

For my company, I have my son hired as "official screwdriver inspector and rubber ring tester"... you think that would work for a tax deduction?

Quoted from Sparky

For my company, I have my son hired as "official screwdriver inspector and rubber ring tester"... you think that would work for a tax deduction?

Yea but then you would get busted for Child Labor   

Quoted from gjd

Just out of curiosity, if you pay yourself a dividend of 40,000, the corp pays 800$ tax, or you as a person receiving the dividend pay 800 tax?

  

Before you can pay yourself any dividend,
you must pay your corporate tax of 16%
(...or perhaps a bit more if you factor provincial tax ).

So using my example of $50K,
you would pay $8000 of corp taxes  (...not $800 ),
and this is money the Corporation pays to the Government,

The remainder ( $42,000) is considered after-tax profit
and can be paid out as a dividend .   (... I think...)


S.

   Heres my .02....My business is incorporated( op.co.), but is wholly owned by another company that I also wholly own ( hold co.). Whenever I dividend $$ from my op.co. to the hold co. there are no tax implications from a  a personal side UNLESS I take the $$ out of my hold co. as dividends or salary or whatever. Many times I will dividend $$ to the hold co. and just invest it there, which again doesn't trigger tax until I take it out( although hold co. can be liable for tax if the investments generate significant gains).

   When I do take a dividend from the hold co., it does usually end up costing in tax about 30% as an average to me personally ( there is a set gross up calculation thats involved). I've never been able to literally take a dividend personally thats tax free.  I WISH I COULD!  The 30% rate though is better than my personal marginal rate for plain old salary so it is still advantageous. One thing thats been mentioned that you have to remember is that you have to file separate Prov. and Fed. tax returns for your incorporated company. These are far from simple, and even though I am a CMA, I have my CA file them for all of my businesses ( I haven't been a practising CMA for many years as well now anyhow). That does cost a few $$ for sure, but trust me you don't want to have the CRA coming into your life if you can avoid it, so filing things 100% properly will save you from potential big stress down the road.


    I think the bottom line is that incorporating isn't the big tax avoidance vehicle that a lot of people think it is. It may save you from some tax, but it costs in other ways. The big benefit from a business owners perspective is to limit the exposure of your personal assets, which would be wide open to creditors if you were an individual.

Quoted from Steph

Before you can pay yourself any dividend,
you must pay your corporate tax of 16%
(...or perhaps a bit more if you factor provincial tax ).

So using my example of $50K,
you would pay $8000 of corp taxes  (...not $800 ),
and this is money the Corporation pays to the Government,

The remainder ( $42,000) is considered after-tax profit
and can be paid out as a dividend .   (... I think...)


S.

Hey steph this from my ca
Yes, because of the fancy mechanics behind dividends, you can receive probably appx. $36,000 without paying income tax  - assuming no other income.  (these are assumed to be "ineligible dividends", which would be the dividends you'd receive if you incorporated).  You would pay, however, a few hundred bucks in tax re: the Ontario Health Premium levy.

Dividends are not deductible to corporations - therefore the corporation pays the tax, instead of the individual.  If the corporation qualifies, the rate of tax for a corp. is around 16.5% right now.

The cons of dividends to recipients:

--they don't go towards CPP

--they don't generate any RRSP room, as they're not considered earned income

In general, you want to be able to "run the numbers" on any situation, such that the tax paid by the corp. + the individuals is minimized!

Wayne

Quoted from Duke

Hey steph this from my ca
Yes, because of the fancy mechanics behind dividends, you can receive probably appx. $36,000 without paying income tax  - assuming no other income.

Thanks, that's good info to have.

Quoted from Duke

Dividends are not deductible to corporations - therefore the corporation pays the tax, instead of the individual.  If the corporation qualifies, the rate of tax for a corp. is around 16.5% right now.

Agreed.
"My" corporation will have to pay 16% tax before any dividend can be paid out.

Quoted from Duke

The cons of dividends to recipients:

--they don't go towards CPP

--they don't generate any RRSP room, as they're not considered earned income

As sole proprietor , I can not claim EI or CPP anyways.

And yes, I can not increase my RRSP room, that's fair.
If I want to do that, I can pay myself a salary instead and then top up my RRSP.
...unfortunately my cash-flow isn't high enough for me to consider RRSP contributions ..


Thanks for the great info.

Cheers,
Steph

current corp.rates...


http://www.kpmg.ca/en/services.....%202nd%20Q_Final.pdf

Quoted from shoeguy

current corp.rates...


http://www.kpmg.ca/en/services.....%202nd%20Q_Final.pdf

So that confirms it...

11% Federal Tax +  5.5% Ontario Tax  = 16.5%  Total Corporate Tax
( ... as Wayne [Duke] pointed out  )


Thanks guys.

Steph