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Newsletter Page 3 - Toronto Certified General Accountant
Newsletter September 2008
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Small Business Needs - (Cont'd - Page 3)
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Lower Small Business Corporation Income Taxes
Timing is everything. Once your business
is viable and making profits, this is the time in its life
cycle to incorporate
and take advantage of the lower small business corporate tax rate. The rate
is
16.5% for business income in the corporation up to $400,000. I draw your
attention to the chart
below that compares the low small business corporate
tax rate of 16.5% to the higher rate that
you would pay personally for
different levels of business income. The government allows the low
small
business corporate tax rate as an incentive for small businesses to prosper.
Small business
is the driving engine of the Canadian economy. The idea is for
small business corporations to
reinvest these tax savings in the business.
Keeping Profits in the Company
If you take profits out of the
corporation and pay yourself a salary, the company would pay less
tax since
it could deduct the payment, but you face tax on those dollars personally at
the levels
shown on the chart below. The strategy is to try to keep the profits
in the company so the tax
savings are not lost. For example, if your company
made $150,000 income (which is within the
income range in the chart between
$123,063 and $400,000), and your company paid you a salary
of $150,000,
46.41% in your hands is a much greater tax hit (about 30% more) than 16.5% in
the company. Being aware of the rates below would help you to reconsider
drawing more money
from the corporation for personal needs than is necessary,
since it will be taxed at a higher rate.
However, there are ways to access
dollars from the company on a tax-free or low-tax basis.
That is a topic for
my next newsletter.
Income
Range
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Personal Income
Tax Rate %
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Small Business Income
Corporation Tax Rate %
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Additional Costs of Maintaining a Corporation
I have mentioned already one disadvantage
to incorporating with respect to start up losses
becoming trapped in the
corporation and not having access to them in your personal income tax
return.
Another disadvantage is the additional legal and accounting costs to maintain a
corporation.
A corporation has a life of its own; it is a separate, legal entity that can exist forever, after we are
all long gone. A minute book is a record of the corporation’s life, and must be
updated on a yearly
basis. This is a
lawyer’s job, who typically keeps the minute book at the office unless you decide
to
keep it. The corporation will be billed by the lawyer accordingly for updating
the minutes on a
yearly basis, which is a tax deductible expense. What if you do
not maintain a minute book? I have
been advised from my legal colleagues that
Canada Revenue Agency can disallow the small
business deduction (which is
responsible for the low small business corporate tax rate) for years
that have
been filed without appropriate updated minutes. A lawyer can do a catch up in
the minute
book for years that need updating. I urge all of you who have
corporations to contact me so that
the necessary steps are taken to update the
minutes of your corporation
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Toronto Certified General Accountant
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