# Sole Prop. vs. Corp. - Consultant Question



## BigSaver (Jun 15, 2011)

Hi Everyone, 

I am married, 34, and in a position to work for a company overseas in Asia, spending about 200 days in said country consulting as a Project Manager. I can set things up one of two ways. Invoice as a sole proprietor using my name on the invoices, then paid directly into my personnel bank account. Or incorporate and have the funds filter through the company and they decide how to pay myself. 

First off, I understand the extra cost/hassle associated with incorporating and the liability advantages. I also understand how a sole proprietor is taxed just like an employee. 
Next, either way I would not have much to write off in either case because flights and accommodations while away would be already taken care of my the overseas firm. I might have a couple thousand in write offs.
I also will have no advantage with regards to income splitting because my wife makes a good salary.

If the rate was say $1000/day for my services, I would be looking at $200,000 per year. If I run it as a sole proprietor, the overseas company is required by there local tax laws, that they pay a withholding tax of 15% to the local tax authorities. So in order to them to pay me the actual $1000/day, I would actually be invoicing for $1177 with 15% of that ($177) being held back. Because this amount ($177/day) is being held back and submitted to the local tax authorities in my name (John Doe), and because there is a tax treaty between the two countries to eliminate double taxation, I get a letter at the end of the year that I use as a foreign tax credit towards my canadian taxes owed. Basically upping my effective rate to the said $1177/day or $235,400/year. That amount taxed in my province as income would be about $88,000 in tax. Add CPP and EI of about $4700 and I would be looking at $142,700 in the pocket (average tax rate of 38%). 

Now if I set up a corporation and bill through my company, the overseas company is not required to withhold any taxes, therefore just paying out a rate of $1000/day paid into the business account. Obviously this would amount to $200,000/year, or 15% less then a sole prop. 

I realize there are tax advantages to incorporating, but I can't figure out a way that they would be great enough to outweigh the extra 15% I would gain as billing as a sole proprietor. I don't require to take out much salary, if any, because we can live almost exclusively on my wife income. If I paid myself just $25000 a year ($3500 tax or 15% = $21500) as salary and then kept the other $175,000 in the company and paid the approx. 15% corporate tax rate (175,000 x .15 = 26,200 in corp tax = 148,800) Then do this for a few years and reinvest the company funds in something that gives me a 6% return or so, and end up with 800,000-1,000,000 in the company. If at that point I took 10 years off to be a stay at home dad (with no other income) and start taking out just the interest gains of about 60,000 on the 1,000,000, I would pay about 14,000 (23.5% tax rate) on it. Taking in 46,000 a year....

Does anyone have an opinion on which route I should take? Is there anyways reason (besides liability) that I should go with incorporating because of how flexible I am on how to pay myself over time?? Can tax deferring be strong enough to outweigh the extra 15% I would get as a Sole P. Any thought would be a big help...


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## MoneyGal (Apr 24, 2009)

You don't have to pay yourself salary from the corp and you undermine some of the advantages of incorporating if you do so. You should run your calcs assuming dividend income only. 

There are a few other potential advantages to incorporation beyond what you've outlined. I'd suggest getting some professional advice from a CA who deals with incorporated foreign professionals.


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## BigSaver (Jun 15, 2011)

Thanks MoneyGal. So looking at taking no income, and paying about 15% small biz corporate tax rate on the $200K, I would be left with $170K. If I paid out a dividend of just $25000, I would just pay 2% (plus the original 15%). I guess I could take out more too...50K would be at a rate of 7% (plus original 15%). I just don't' know if it could outweigh the extra 15% I would get as a sole pro.


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## MoneyGal (Apr 24, 2009)

15% is a high hurdle rate.


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## BigSaver (Jun 15, 2011)

Sorry, but what do you mean by that?


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## MoneyGal (Apr 24, 2009)

Exactly what you already said! If incorporating "starts" at a 15% advantage, such that it has to peform better by 15% in order to perform as well as the sole proprietorship, then 15% becomes the "hurdle rate" for incorporation.


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## BigSaver (Jun 15, 2011)

I got ya..assuming you meant that the incoporationg starts at a 15% disadvantage. It's going to be hard to get that back even with the tax savings of being incorporated. 

I have another question for you now that I have your attention... . I took this year off work due to family related issues, and therefore have no income. I am thinking of withdrawing some RRSP's because I feel that although compounding is great....I will be taxes fairly high in my later year due to higher high withwraws and other sources of income. Do you think this is a wise time? Perhaps also sell off some personal ETF lumped investments that have made 30-40K gains... lower capital gains?? Thanks.


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## Latito (Nov 18, 2013)

Perhaps I'm missing something obvious here, but if the company is willing to pay an invoice of $1177 / day to you as a Sole Prop, why wouldn't they be willing to pay the same amount to you as a corporation? This would eliminate that 15% hurdle.


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## Taraz (Nov 24, 2013)

Incorporation doesn't really limit liability much. If you think you might get sued, you should probably get errors and omissions and general liability insurance.


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