# Benefits of taxation for corporation vs self employment income



## groceryalerts (May 5, 2009)

I would appreciate some feedback on any taxation benefits.

I run a business and I have a day job (t4). 

I am contemplating incorporating the business and just getting taxed on the profits of the business (dividend income). 

As it stands now, any profits will be taxed at the highest marginal rate and probably not the best thing to do.

Anyone else had this scenario and any tips to save money on taxes in this scenario (T4 + small business income).

Thanks!


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## Four Pillars (Apr 5, 2009)

I'm not an expert myself, but the concensus from "the experts" is that if you are going to be withdrawing all the excess profit from the corporation then it's not worth incorporating.

The corporation gets taxed first, then you get taxed on the withdrawal (even at a lower dividend rate). Add it up and you probably aren't saving anything.

The benefit of incorporation comes from delaying payout to a more advantageous time as well as having the ability to pay family members in dividends.

I'm interested in this question as well - I'd love to hear from someone who has analysed this indepth.


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## groceryalerts (May 5, 2009)

Four Pillars said:


> I'm not an expert myself, but the concensus from "the experts" is that if you are going to be withdrawing all the excess profit from the corporation then it's not worth incorporating.
> 
> The corporation gets taxed first, then you get taxed on the withdrawal (even at a lower dividend rate). Add it up and you probably aren't saving anything.
> 
> ...


What if I was able to income split the profits of the corporation (my wife and I as shareholders).

Thanks.


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## Plugging Along (Jan 3, 2011)

We are small business and are incorporated, and I also have regular employment income. We did are calculations more than 10 years ago, so some of the numbers will have probably changed. 

Your corporate tax rate is lower, and if you take it as a dividend, there is a small break of about 1.7 – 2.0% tax (based in AB) if the income from the small business is over about $75000 – 80000 (that was the number years ago based on the tax rates then). Anything less it didn’t make sense to incorporate solely for tax purposes. How ever the up to 2% savings alone, shouldn’t be the only consideration. You need to factor in the cost of incorporating, the paper work involved, and the additional costs to file your tax returns. My business income tax costs me about 4 times more than my personal. So there is a yearly cost too. If you are need to take all of the money out of the corporation every year, there is less of a benefit to incorporate also. 

The tax advantages lie when you can income split, or defer income into lower earning years. You can pay a spouse or child (providing it’s set up correctly) an income, assuming they are doing work, and pay a lower tax rate and that amount. You can also split dividends, however, you can’t just arbitrarily decide to change the splits each year, you have to do this when you set up the shares. In your question, could you pay your spouse and split, the short answer is yes. Whether or not it will be a benefit is another question. It depends on what you are two tax brackets normally, how much will you be bringing in, do you need to takeout the money for your living expenses, or can you wait until the future. We found when I was on mat leave, and my spouse was laid off from his employment income job, we were able to plan out the payouts to minimize taxes and maximize EI payments, so there were many benefits there. There are many factors to determine if incorporation is right for your situation or not.


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## Four Pillars (Apr 5, 2009)

@Groceryalerts @Plugging Along You don't need to be incorporated to split income with a family member if they are doing work for the business. It works with a sole proprietorship as well.


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## Plugging Along (Jan 3, 2011)

Sorry, that is true about the income splitting, a family member could get an income if its a sole propietorship if they are doing the work. However, if they are not doing work, then you could do it through a corporation through a dividend. I guess the real advantage is the ability to defer income into future years where a person may have a lower tax bracket. There are some other advantages too of course, but that's been our biggest one so far.


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## jason26 (Apr 6, 2009)

Is a family trust an option? I do strictly contract work through my trust and it allows for tax efficient distribution of the income to my spouse and my kids. I don't know as many of the details as I should - but that is what I pay more lawyer and accountant for.


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## kcowan (Jul 1, 2010)

The tax on dividends with the credit plus the corporate tax is a wash everywhere but AB.

Splitting/deferring income is main advantage.

By taking dividends, you pass up CPP contributions.


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## I'm Howard (Oct 13, 2010)

Are not the first $200,000 of earnings tax free?


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## atrp2biz (Sep 22, 2010)

I'm Howard said:


> Are not the first $200,000 of earnings tax free?


No. You might be confusing it with the Small Business Deduction where the first $500,000 ($400,000 in few provinces) of income of a CCPC is taxed at a lower rate?


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## sprocket1200 (Aug 21, 2009)

we have incorporated which was especially useful in using dividends when paying different shareholders/partners. this allows the most flexibility.

be sure that each share holder has access to a different class of shares.


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