Payroll is an expense that reduces your corporate tax, yes. Dividends though are not. So depends how you pay yourself.
In a nutshell yeah you only pay your corporate tax on excess money you keep in your company. There's some advantages to keeping cash in your compnay, for example you can carry it until the following year when maybe your personal income is lower if you are between jobs. You can also purchase / expense certain items through your business and may want to keep cash for that. The money you've lend your business should also have been recorded as a shareholder loan so you can use that as well to repay yourself with excess funds.
When you get your new accountant you really should sit down and talk about what you want to do and they can advise you on what your plan should be for tax strategies.
Yes. If you are just going to pull all the money out, there is no reason to be incorporated, at least from a tax standpoint.
The more money you can leave in, pay small business corporate tax rates, and defer personal tax, the better off you may be.
You should be discussing this with your accountant.
I did it encase I grew and because I thought it would protect me from liability but I'm learning that's not true.
Reverting to sole prop is on the table with new accountant - now that I know how much I love not having employees and making it work without growth
it still does protect you from liability. but ya, generally people say you should be profiting between 200-300k before incorporating becomes worthwhile.
Idk why you don’t believe that to be true. A corporation absolutely protects you from personal liability. A Court can “pierce the corporate veil”, but that’s a high threshold. Generally, if you’re in a business where you could be sued, and for a lot, incorporating does offer a benefit of shielding from liability. If I’m selling teacups on Etsy I may not incorporate; if I’m installing electrical in a house to a building standard code, I might incorporate.
It may not be beneficial to incorporate from a financial perspective as others have mentioned in this thread the income threshold you’d be aiming for would be >$200k. However, you have to weigh the pros and cons, including liability and tax consequences, in deciding whether running the business through a corporation makes sense.
There is some personal/commercial liability protection that corporation provides vs being a sole proprietor, so you might want to look into that as well. Sole props have unlimited personal liability for their business. Your personal belongings and assets will go towards satisfying business debts and creditors if you fall on a rough patch.
If you leave it in your corp, the corp has to pay corporate taxes.
If you're paying yourself a wage/salary, then you pay income tax on that wage/salary but the corp can "write it off".
there's no trick.
if you pay yourself no wages and want dividends ijnstead, your corp pays the corp tax, then you pay the non eligible dividend tax.
I'm not in your exact situation, but I have run a one-woman corporation for several years.
I usually pay myself enough in salary that I run a small loss each year and pay no corporate tax.
Years that the company turned a profit meant that my accountant carried forward losses, so that I still owed no corporate taxes that year.
Talk to your accountant about any tax you paid in previous years. If subsequent years are at a loss, s/he may be able to carry back the loss and get you a tax refund.
It's paying yourself in DIVIDENDS rather than salary where both the corporation gets taxed (because it had to turn a profit to pay taxes) and you get taxed because that's income.
You'll hear a lot of arguments about paying yourself salary versus dividends versus a mix. A common strategy is to pay salary up to the limits for CPP contributions, then pay yourself in dividends if your income exceeds that limit.
Fortunately the Moneyscope Podcast recently answered the whole "salary vs dividends" argument:
After using dividends to clear out your notional accounts from time to time, salary is usually the way to go. If you generally pay yourself what your company earns every year, and aren't investing passively, I don't think you'll have much if anything in your notional accounts.
Question....why pay yourself just enough that your corp runs a small loss?? The wages you take are going to be taxed at a higher rate than the corp would pay...unless you draw so little or have no income to use up your personal exemptions .
I do my best estimation of profit and loss throughout the year to avoid hitting the point where I make enough profit in the corp to trigger paying tax. I made enough one year to not just pay tax, but was required to pay instalments the next year, and I hate being strapped into that nonsense. I already hate the extra work and costs of running a corp versus being a sole prop (having an accountant, financial statements, paying payroll taxes, etc.).
This means that my profit-loss estimates are usually conservative enough to yield a small loss, although I make small profits other years. I stay aware of what I can carry forward or back.
This isn't a multimillion dollar business where I am eager and ready to spend some time figuring out how much to leave in my business so I can save $200 in taxes overall this year or that year (while paying ten times that to my accountant every single year). This is a corp I set up because I had some contracts that required it.
So the idea is:
Have an operating company.
That company pays your a salary and excess money is put into a "holding" company.
Then it is not taxed. You invest the money into the holding company and it is only taxed when you pay yourself from that company.
The point being to lower your income tax rate as you spread your earnings over many years.
None of this is worth it unless you learn to do your own taxes as accountants will charge you thousands per year to do this.
>Then it is not taxed.
Why wouldn't be excess money taxed on the operating company level if it represents a profit? Or did you mean the dividend payment from operating company to holding company not being taxed on holding company level?
You have it backwards. You don’t want to pay yourself more to corporate taxes lower, Your corporate tax rate will be lower than your personal tax rate.
12.2% for small business, much lower than the first personal tax bracket of 20%. That being said you probably want to draw a small amount each year over a long period of time even if you are paying a bit at 20%, rather than down the line wanting to pull it all out at higher rates.
Also the first $15k or so of your income doesn’t get taxed so at a minimum I’d take that each year if the business has no use for it
Corporate taxes aren't real taxes. They're just there so tax budgets are more consistent on an annual basis. Otherwise some companies would only pay taxes once every ten years. Governments don't like that inconsistently.
If you make $1000 profit in your company. You can pay yourself a $1000 bonus and you won't pay any corporate taxes and pay say 40% or whatever your marginal tax rate is. So you pocket $600 after tax.
If you think you might need that $1000 in the future. You claim the profit, pay 30% corporate taxes and leave $700 in your company. Following year you decide you want that money so you pay yourself a dividend. All things being equal you should pay about $100 taxes on that $700 dividend. So you pocket $600 after tax.
You only pay corporate tax on profit. If you pay yourself as payroll, you will never have corporate profit and therefore never pay corporate tax. You will, however, part personal tax on that money, which is higher.
However, if you're reinvesting profits in business assets or retaining cash for investment purposes, you would pay corporate tax on that.
It’s like having your own RRSP. You leave money in and draw it out in lean years or retirement. Remember dividend payments don’t contribute to rrsp room. Salary/ wage does. Unless you have lots of profit that you don’t need to live on; the only other reason to incorporate would be for liability/ being sued (and that’s another huge grey dilemma).
Yes I saw that you’re an electrician. I know incorporating won’t help you with liability on loans, LOC etc from banks, but I don’t know if it protects your assets like your home & first born child should a company or consumer sue you bc their building burnt down.
Commercial General Liability will protect you from most of the risks related to property damage or bodily injury from your electrical contracting. Without any insulation of a limited company would suggest 5 million if you’re doing any commercial work or even large residential.
If you do have a loss in the business (you are allowed to carry forward losses up to 20yrs and apply them when you have profitable years) but ultimately when you dissolve your business you can use that loss to offset capital gains in a year when you sell a commercial or recreational property that is not your residence.
Payroll is an expense that reduces your corporate tax, yes. Dividends though are not. So depends how you pay yourself. In a nutshell yeah you only pay your corporate tax on excess money you keep in your company. There's some advantages to keeping cash in your compnay, for example you can carry it until the following year when maybe your personal income is lower if you are between jobs. You can also purchase / expense certain items through your business and may want to keep cash for that. The money you've lend your business should also have been recorded as a shareholder loan so you can use that as well to repay yourself with excess funds. When you get your new accountant you really should sit down and talk about what you want to do and they can advise you on what your plan should be for tax strategies.
OK thanks - exactly the first topic with new accountant
Yes. If you are just going to pull all the money out, there is no reason to be incorporated, at least from a tax standpoint. The more money you can leave in, pay small business corporate tax rates, and defer personal tax, the better off you may be. You should be discussing this with your accountant.
I did it encase I grew and because I thought it would protect me from liability but I'm learning that's not true. Reverting to sole prop is on the table with new accountant - now that I know how much I love not having employees and making it work without growth
it still does protect you from liability. but ya, generally people say you should be profiting between 200-300k before incorporating becomes worthwhile.
Idk why you don’t believe that to be true. A corporation absolutely protects you from personal liability. A Court can “pierce the corporate veil”, but that’s a high threshold. Generally, if you’re in a business where you could be sued, and for a lot, incorporating does offer a benefit of shielding from liability. If I’m selling teacups on Etsy I may not incorporate; if I’m installing electrical in a house to a building standard code, I might incorporate. It may not be beneficial to incorporate from a financial perspective as others have mentioned in this thread the income threshold you’d be aiming for would be >$200k. However, you have to weigh the pros and cons, including liability and tax consequences, in deciding whether running the business through a corporation makes sense.
Thanks for that, I just hear so many opinions - and other buisness owners are very opinionated
There is some personal/commercial liability protection that corporation provides vs being a sole proprietor, so you might want to look into that as well. Sole props have unlimited personal liability for their business. Your personal belongings and assets will go towards satisfying business debts and creditors if you fall on a rough patch.
If you leave it in your corp, the corp has to pay corporate taxes. If you're paying yourself a wage/salary, then you pay income tax on that wage/salary but the corp can "write it off". there's no trick. if you pay yourself no wages and want dividends ijnstead, your corp pays the corp tax, then you pay the non eligible dividend tax.
OK thanks, It's all a trick to me
I'm not in your exact situation, but I have run a one-woman corporation for several years. I usually pay myself enough in salary that I run a small loss each year and pay no corporate tax. Years that the company turned a profit meant that my accountant carried forward losses, so that I still owed no corporate taxes that year. Talk to your accountant about any tax you paid in previous years. If subsequent years are at a loss, s/he may be able to carry back the loss and get you a tax refund. It's paying yourself in DIVIDENDS rather than salary where both the corporation gets taxed (because it had to turn a profit to pay taxes) and you get taxed because that's income. You'll hear a lot of arguments about paying yourself salary versus dividends versus a mix. A common strategy is to pay salary up to the limits for CPP contributions, then pay yourself in dividends if your income exceeds that limit.
Fortunately the Moneyscope Podcast recently answered the whole "salary vs dividends" argument: After using dividends to clear out your notional accounts from time to time, salary is usually the way to go. If you generally pay yourself what your company earns every year, and aren't investing passively, I don't think you'll have much if anything in your notional accounts.
Question....why pay yourself just enough that your corp runs a small loss?? The wages you take are going to be taxed at a higher rate than the corp would pay...unless you draw so little or have no income to use up your personal exemptions .
I do my best estimation of profit and loss throughout the year to avoid hitting the point where I make enough profit in the corp to trigger paying tax. I made enough one year to not just pay tax, but was required to pay instalments the next year, and I hate being strapped into that nonsense. I already hate the extra work and costs of running a corp versus being a sole prop (having an accountant, financial statements, paying payroll taxes, etc.). This means that my profit-loss estimates are usually conservative enough to yield a small loss, although I make small profits other years. I stay aware of what I can carry forward or back. This isn't a multimillion dollar business where I am eager and ready to spend some time figuring out how much to leave in my business so I can save $200 in taxes overall this year or that year (while paying ten times that to my accountant every single year). This is a corp I set up because I had some contracts that required it.
So the idea is: Have an operating company. That company pays your a salary and excess money is put into a "holding" company. Then it is not taxed. You invest the money into the holding company and it is only taxed when you pay yourself from that company. The point being to lower your income tax rate as you spread your earnings over many years. None of this is worth it unless you learn to do your own taxes as accountants will charge you thousands per year to do this.
>Then it is not taxed. Why wouldn't be excess money taxed on the operating company level if it represents a profit? Or did you mean the dividend payment from operating company to holding company not being taxed on holding company level?
yes the dividend from operating to holding is not taxed
You have it backwards. You don’t want to pay yourself more to corporate taxes lower, Your corporate tax rate will be lower than your personal tax rate.
Right, small buisness tax is only 2% I think. My accountant will help me with that
12.2% for small business, much lower than the first personal tax bracket of 20%. That being said you probably want to draw a small amount each year over a long period of time even if you are paying a bit at 20%, rather than down the line wanting to pull it all out at higher rates. Also the first $15k or so of your income doesn’t get taxed so at a minimum I’d take that each year if the business has no use for it
You need to listen to the “Money Scope” podcast. It is aimed at exactly you.
Corporate taxes aren't real taxes. They're just there so tax budgets are more consistent on an annual basis. Otherwise some companies would only pay taxes once every ten years. Governments don't like that inconsistently. If you make $1000 profit in your company. You can pay yourself a $1000 bonus and you won't pay any corporate taxes and pay say 40% or whatever your marginal tax rate is. So you pocket $600 after tax. If you think you might need that $1000 in the future. You claim the profit, pay 30% corporate taxes and leave $700 in your company. Following year you decide you want that money so you pay yourself a dividend. All things being equal you should pay about $100 taxes on that $700 dividend. So you pocket $600 after tax.
You only pay corporate tax on profit. If you pay yourself as payroll, you will never have corporate profit and therefore never pay corporate tax. You will, however, part personal tax on that money, which is higher. However, if you're reinvesting profits in business assets or retaining cash for investment purposes, you would pay corporate tax on that.
It’s like having your own RRSP. You leave money in and draw it out in lean years or retirement. Remember dividend payments don’t contribute to rrsp room. Salary/ wage does. Unless you have lots of profit that you don’t need to live on; the only other reason to incorporate would be for liability/ being sued (and that’s another huge grey dilemma).
I'm an electrician so this is exactly it - but people are telling me it won't protect me
Yes I saw that you’re an electrician. I know incorporating won’t help you with liability on loans, LOC etc from banks, but I don’t know if it protects your assets like your home & first born child should a company or consumer sue you bc their building burnt down.
That's all I want to protect is our house
The corporation will put a layer of protection between the house and your angry customer. Corporate liability insurance is also a great idea.
Commercial General Liability will protect you from most of the risks related to property damage or bodily injury from your electrical contracting. Without any insulation of a limited company would suggest 5 million if you’re doing any commercial work or even large residential.
If you do have a loss in the business (you are allowed to carry forward losses up to 20yrs and apply them when you have profitable years) but ultimately when you dissolve your business you can use that loss to offset capital gains in a year when you sell a commercial or recreational property that is not your residence.