Entrepreneurship & Small Business

Tax question about incorporating my business

  • Last Updated:
  • Feb 11th, 2021 10:53 am
[OP]
Member
Apr 26, 2010
276 posts
35 upvotes

Tax question about incorporating my business

Hi!

I have a small business and make ~230k/year on average.
No employees, only me.

If I understand correctly, the money I "reinvest" in my business, instead of being taxed at ~53% (marginal), I would pay about 20% (corporation tax rate in Quebec).

But here's what I don't understand.

When I ultimately decide to take this money out of my business say at my retirement in 25 years, won't I be taxed once more on this money, this time at my personal tax rate?

If so, then wouldn't it be like getting taxed twice?
I understand I might not be taxed at 53% at retirement but I just don't undestand how it could be worth it with all the added costs, complexity and responsabilities that comes with incorporating if on top you get taxed twice on the same money...

I must be missing something...

Thanks for telling me what I might be missing here!

There
4 replies
Member
Aug 13, 2003
411 posts
247 upvotes
Calgary
Malkavian wrote: Hi!

I have a small business and make ~230k/year on average.
No employees, only me.

If I understand correctly, the money I "reinvest" in my business, instead of being taxed at ~53% (marginal), I would pay about 20% (corporation tax rate in Quebec).

But here's what I don't understand.

When I ultimately decide to take this money out of my business say at my retirement in 25 years, won't I be taxed once more on this money, this time at my personal tax rate?

If so, then wouldn't it be like getting taxed twice?
I understand I might not be taxed at 53% at retirement but I just don't undestand how it could be worth it with all the added costs, complexity and responsabilities that comes with incorporating if on top you get taxed twice on the same money...

I must be missing something...

Thanks for telling me what I might be missing here!

There
The money that you have "reinvested" or left in the business has had corporate tax paid on it. When you take out that money it will come out as a dividend which has a lower tax rate. If you add up the tax paid by the corporation (corporate tax rate) plus the tax that you pay on the dividend (personal dividend tax rate), it will be the same amount of tax as if you took the money out as an employee originally. This is known as Tax Integration.
Deal Addict
Mar 3, 2018
1860 posts
1843 upvotes
GTA
The main benefit of a corporation is tax deferral where your extra money can be earning investment income rather then paying higher current personal taxes. If you have maxed out your RRSP and TFSA this is another vehicle to use to defer taxes. Tax rate wise it will be basically the same when you combine corp tax and the lower tax rate applied on dividends paid to you. But the pot should be larger with investment income growth from deferred taxes.
Newbie
Jan 23, 2017
49 posts
16 upvotes
etobicoke
On a side note - based on what you're saying, you could also be considered to be a Personal Services Business - PSB in short.
A PSB is not eligible to take advantage of the lowered tax rate, and the 'expense' writeoffs that most businesses take.
It might be worth checking the 4 pillar test to determine whether you are a PSB..

If the CRA does one day knock on your door - the impact of changing business income to personal income will be significant!!
https://www.taxtips.ca/glossary/persona ... siness.htm
Newbie
Feb 17, 2017
70 posts
18 upvotes
Running a simple corporation shouldn't cost more than $2k per year in professional fees. Depending on the situation, the tax savings can make this expense worthwhile. I recommend consulting an accountant.

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