Tax question about incorporating my business

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Feb 11th, 2021 10:53 am

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Feb 6th, 2021 7:24 pm

Malkavian [OP]: Member; Apr 26, 2010; 312 posts; 43 upvotes

Feb 6th, 2021 7:24 pm

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

Feb 6th, 2021 9:24 pm

DentDude: Sr. Member; Aug 13, 2003; 507 posts; 363 upvotes; Calgary

Feb 6th, 2021 9:24 pm

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.

Feb 6th, 2021 9:47 pm

DaveTheDude: Deal Addict; Mar 3, 2018; 2803 posts; 3082 upvotes; GTA

Feb 6th, 2021 9:47 pm

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.

Feb 8th, 2021 11:31 pm

absolutguju: Newbie; Jan 23, 2017; 68 posts; 22 upvotes; etobicoke

Feb 8th, 2021 11:31 pm

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

Feb 11th, 2021 10:53 am

zorg001: Newbie; Feb 17, 2017; 90 posts; 23 upvotes; Hamilton, ON

Feb 11th, 2021 10:53 am

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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