# Incorporation and dividend tax - please check my calculation



## ranelari17 (Nov 24, 2010)

Hi all,

I'm glad to have found this very useful forum while browsing the net.

I had one question I was hoping you guys could help me with.

For net income of $127,021
Taxes payable = $ 35,859
CPP paid on employment income = $ 2,163 
EI paid on employment income = $ 747

Net income after taxes / before RRSP deduction in BC would be *$88,252*,

according to taxtips.ca calculator.
http://www.taxtips.ca/calculators/taxcalculator.htm

________

Let's say if I decide to incorporate in the hopes of reducing taxes payable,
2010 corporate income tax rate of 18% federal + 10.5% BC

http://www.taxtips.ca/smallbusiness/corporatetax/corptaxrates2010.htm

Net income for corporation = $127,021
Taxes payable =$36,200
Net income after taxes = $90,821

Let's say I give the full amount, $90,821 to myself in dividends.

Marginal Tax rate for small business dividends is
First $35,859 = 4.16% (federal+BC combined)
over $35,859 up to $40,970 = 7.46%
.
..
...
over $99,987 up to $127,021 = 29.96%

According to this table
http://www.taxtips.ca/taxrates/bc.htm

Question 1. When calculating marginal tax rate from this $90,821 dividend,
do I use 25% gross up? ($113,526) or has taxtips.ca already accounted for this in their table for marginal rate?

taxtips.ca says,
"Marginal tax rate for dividends is a % of actual dividends received (not grossed-up amount)."

Anyways, if I calculate based on taxtips.ca quote,

Dividend = $90,821
Taxes payable = $11,257
Net = $79,564

Now, looking at small business dividend tax credit, according to this page,
http://www.taxtips.ca/dtc/smallbusdtc.htm

In 2010, federal 16.67% + BC 4.25%
Tax credit = $90,821 * 0.2092 = $19,000

$79,564 + $19,000 = *$98,564*

minus the set up and administrative costs (which is approximately how much?)



Comparing 
without incorporation = $88,252
with incorporation = $98,564,

I would save ~ $10,000 (minus set up costs) in taxes?

Did I miss anything in my calculations?

Thanks a lot for your help in advance!!


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## ghostryder (Apr 5, 2009)

If you use the taxtips calculator and only put in the $90,821 in dividends into the "CCPC dividends" box and no other income/deductions/tax credits you end up with:


$78,710 net income after taxes.



$90,821 in dividends
= 123,526 grossed up income (line 260 taxable income)


$90,821
- 12,111 fed & prov income tax

=78,710 take home


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## ranelari17 (Nov 24, 2010)

hmm.. ok..

Which tax rate would I use for corporate income tax?
General (18+10.5%) or Small Business(11+2.5%)?


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## Farly (Aug 18, 2009)

I notice you are now employed and are thinking about incorporating. Your corporation might be considered a person services business, which is not entitled to the same business deduction. If you Google personal services business, you will get a better explanations than I can give.


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## redpoint (Mar 15, 2010)

Great post. However the results don't make sense to me. 

I would expect the incorporated with dividends to be better. You can write of business expenses like a computer and phone effectively for paying for these with pretax dollars but even before that it should still work out better. 

There is also another option: incorporating and paying out a salary. Not sure if its better but you can collect the CPP in retirement and draw UI if necessary.

Cheers,
Steve


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