Incorporation and its Benefits
- Opportunity to defer tax on income retained in the Corporation. Corporation pays tax at 15.5% on income up to $500,000. Individual’s marginal rate of tax increases from 21% at the lowest bracket, to 46% in the highest tax bracket.
- Opportunity to split income with family members. Salary paid to family members must be reasonable in amount, reasonableness based on job description and what would be paid to an unrelated person to do that job. Usually difficult to justify a meaningful amount of salary. Dividends are an alternative way to split income, only justification required is that the person be a shareholder. Though the 2013 Budget has caused the tax on dividends to be higher than before the Budget, there is still tax savings to be had. Family members, over the age of 18, can still receive a substantial amount of dividends without attracting tax. Family members that can be shareholders of a Professional Corporation and therefore receive a dividend are spouses, children and parents.
- Opportunity to hold life insurance in the Corporation. Proceeds received out of a life insurance policy will be received tax free. Paying the premiums personally, out of after tax dollars is more costly than if the Corporation was the owner and beneficiary of the life insurance policy. The premiums would be paid with the Corporation’s after tax dollars. As the Corporation pays tax at 15.5% in order to have after tax dollars, and the individual is most likely paying 46% to have after tax dollars, it is less expensive to have the policy owned by the Corporation. On death the life insurance proceeds come into the Corporation tax free, and can be paid out of the Corporation to the beneficiary tax free.
- On the purchase of a Practice where borrowed funds are used, it will be less expensive to repay the loan by doing so through a Corporation. The theory is the same as the previous point. In order to be able to repay the loan, one needs to have after tax dollars available. In a Corporation, one has $0.845 left on every dollar earned (after tax of 15.5%), to repay the bank. If the practice is purchased personally, the individual will only have $0.54 left on every dollar earned (after tax of 46%), with which to repay the bank loan.
- Generally it is not beneficial to purchase a vehicle using Corporation funds. The Income Tax Act has a section that causes a taxable benefit for an individual having the use of a Company car. There is a ceiling on the amount that can be used to calculate the amortization for the vehicle for the year. However there is no ceiling on the taxable benefit calculation. The benefit is calculated at 2% per month of the original cost of the vehicle. Amortization writes off 30% of the balance in the “vehicle pool” on a declining balance basis with the pool ceiling being $30,000 plus HST. Therefore each year the Company receives a deduction on a declining number, yet the individual pays tax on the gross amount. If for example the vehicle costs $50,000, the individual would annually be paying tax on an additional $12,000 of income ($50,000 × 2% x 12).