Personal Finance

What are the main advantages of getting paid as a business vs employee?

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  • Dec 25th, 2017 7:36 pm
Newbie
Aug 12, 2017
52 posts
8 upvotes

What are the main advantages of getting paid as a business vs employee?

You hear of people so happy they set up a company so they can control their income more for tax purposes. But doesn't CRA offer more tax advantages and deductions for personal income vs business income? Are they using a company mainly to control liability? Sure they can structure their income much lower to minimize taxes, maybe the company can buy their house and car and pay for clothing and other expenses. So are the writeoffs much better with a company? Certainly an employee can't write off a new suit but a business can have clothing expenses. What do you think? And are most people really glad they went this direction?
5 replies
Deal Addict
Feb 25, 2007
1569 posts
1129 upvotes
Ottawa
If you do things well, what you can write off as an incorporated business vs as personal business income is pretty similar. Not quite identical, but similar. And the tax rates are defined such that if you make a "living income" with your business each year, and withdraw and spend it on personal expenses each year from your company as a sole owner, taxwise you'll end up about the same (principle of integration).

The benefits from incorporation come from a couple of opportunities that may or may not apply in a given situation:
  1. (As you said) Some degree of liability protection.
  2. Greater ability to smooth out income over time, i.e. "income splitting with your future self". If you make $100k in your business each year and pay it to yourself as salary, or dividends, tax integration means your total tax will be about the same. But if you dribble out your retained earnings over several years, under (+- approx) $40-50k per year, you can make your total tax be ~15% (depends a bit on province). And if your corporation makes $250k one year and $0 the next, and you retain $125k of year 1 earnings and pay it out in year 2, you'll pay quite a bit less personal income tax.
  3. Ability to income split with spouse and/or other relatives (or close friends). Changes to tax policy are making this less viable/attractive, but can still make a difference
  4. If you pay yourself with corporate dividends, you can avoid EI and CPP payments. Of course, you also don't earn CPP headroom; but some people prefer it that way.
I have a consulting business, incorporated. Makes a ton of sense for me for 3 of the 4 reasons. I get some (limited) liability protection. I won't need the money until many years from now, so I can income smooth. And my wife has a DB pension, so the life expectancy risk mitigated by CPP is not something I value. But my wife has a decent income, so income splitting with dependents doesn't apply to me.
Deal Addict
User avatar
Mar 31, 2009
1219 posts
884 upvotes
The above poster has it right.

I think you were eluding to buying personal stuff in the company and expensing it in the company even though it's personal. That can get you into big trouble with CRA. Don't do that unless you want to get wrecked in an audit. You'd have to talk to a qualified accountant to determine what is a reasonable business expense and what is not. But for anyone who starts a corporation and thinks they're going to write off everything and the kitchen sink - that's not how it works unless you want to break rules and get into huge trouble.
Sr. Member
Aug 17, 2006
572 posts
693 upvotes
Toronto
OP, your question isn't clear.

If you're asking about incorporating vs having a sole proprietorship, you've received answers above. Please note that increased accounting fees and recent Trudeau tax chances may have negated those benefits.

If you're asking about employee income vs business income, then the main difference is the ability to write off business expenses. That being said, you generally can't choose to be a business. It is generally decided upon based on the work you do. The CRA has literature online that helps you determine whether you are a business or a salaried employee.
Deal Addict
Jan 2, 2015
1633 posts
639 upvotes
Toronto, ON
You have to be careful about valid business expenses. For instance, a uniform wouldn't be considered a valid business expense. Generally you can claim expendable materials (office supplies, insurance expenses, etc) as expenses.

If you're buying something "permanent" like a truck, you cannot claim the cost of the truck. That's not a business expense. You claim depreciation expense on the truck, which means you effectively claim the whole price of the truck over several years, minus the resale or scrap value. You might not even be able to claim the whole price of the truck if it's "too expensive".

There are rules for "personal expenses" paid for by a corporation. If you have personal use of a company-owned vehicle, that use is imputed as income on your personal taxes. In general, you get a tax break for using the vehicle for work purposes. A lot of supposed business travel isn't. Driving from your home to the office and back isn't considered work travel. I think even driving from home to your first client, and driving from your last client to home, doesn't count. You would have to travel a long distance or to multiple work-related destinations to claim those expenses, and you need to document everything carefully.
Deal Guru
User avatar
Nov 18, 2005
11955 posts
3699 upvotes
Kingston
BobMackie wrote: You hear of people so happy they set up a company so they can control their income more for tax purposes. But doesn't CRA offer more tax advantages and deductions for personal income vs business income? Are they using a company mainly to control liability? Sure they can structure their income much lower to minimize taxes, maybe the company can buy their house and car and pay for clothing and other expenses. So are the writeoffs much better with a company? Certainly an employee can't write off a new suit but a business can have clothing expenses. What do you think? And are most people really glad they went this direction?
A company CANNOT pay for personal items such as your house, car, clothing. As houska said there isn't much difference between what you could write off as a sole proprieter (unicorporated) business and an incorporated business.

A corporation does allow you to smooth out taxes if your business produces high income. Income is initially taxed at the corporate tax rate (relatively low for small businesses). But income paid from the business to the owners as either salary or dividends ultimately is taxed at full personal rates (dividend tax credits merely take into account taxes that the corporation has already paid). But if you want to spend that high income personally every year there is no tax advantage.

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