# Incorporating One's Self



## cynbad (Feb 20, 2012)

Hi there,

I work full time and get paid bi-weekly with all the proper deductions. However, I do work overtime and the company pays it with a cheque and no deductions are made. I make approximately $5000 in overtime per year. Instead of claiming it as other income on a tax return, our accountant at work suggests that I should incorporate myself, so I don't have to pay so much tax on the overtime pay. 

I like the idea of paying less in tax, but I am wondering if it's worth it for such a small amount. I cannot see myself accumulating more overtime than $5000 in a year. Any advice would be appreciated.


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## Homerhomer (Oct 18, 2010)

cynbad said:


> Hi there,
> 
> I work full time and get paid bi-weekly with all the proper deductions. However, I do work overtime and the company pays it with a cheque and no deductions are made. I make approximately $5000 in overtime per year. Instead of claiming it as other income on a tax return, our accountant at work suggests that I should incorporate myself, so I don't have to pay so much tax on the overtime pay.
> 
> I like the idea of paying less in tax, but I am wondering if it's worth it for such a small amount. I cannot see myself accumulating more overtime than $5000 in a year. Any advice would be appreciated.


Oh boy, where to start 

First of the employer puts themselves at a huge risk not making proper deductions from the over time pay, they are required by law to remit proper deductions, regular pay or not, if their payroll gets audited they will be in a big doodoo.

Your accountant at work either doesn’t know what he/she is talking about, or you didn’t understand.

First off, you are an employee, they pay you as employee end of story, over time pay can not be transferred to a corporation.

Secondly the tax rate for small corporation is indeed lower than personal tax rate, however the second you withdraw money from the corporation you are taxed at your personal tax rate, so the only savings you would have if the profit stays in the corporation and not withdrawn for personal purposes.

Claiming your overtime income as other income on the tax return can also cause issues if you are below CPP threshold, and that's because other income does not create pension deduction, CRA is not a big fan of that.

And lastly, the legal, accounting and other fees would eat up much of your profit, filing corporate taxes is much more expensive than filing personal taxes.


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## MoneyGal (Apr 24, 2009)

Well. First, the costs of incorporating and then filing corporate tax returns are going to eat up most of that $5000 every year.

Secondly, you'd need to move ALL of your income - not just the bonus income - into the corporation. You can't be both an independent incorporated consultant providing services to a company and an employee of the same company - CRA would never allow it. So you'd have to sever your employment relationship. 

Finally - and this is the biggest drawback - as a personal service business, you'd be subject to the highest rate anyways - you're not eligible for the active business income rate. Yes, you can take deductions against that income, but you have to actually incur the expenses in order to claim them. It isn't necessarily the free ride deductibility is portrayed as. 

Here's a good, objective read from BDO on personal services businesses: 

http://www.bdo.ca/library/publications/tax/taxfactors/2004-03a.cfm


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## MoneyGal (Apr 24, 2009)

Homerhomer said:


> Secondly the tax rate for small corporation is indeed lower than personal tax rate, however the second you withdraw money from the corporation you are taxed at your personal tax rate, so the only savings you would have if the profit stays in the corporation and not withdrawn for personal purposes.


He's going to be subject to the highest rate anyways.


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## cynbad (Feb 20, 2012)

Thank you very much for the helpful insight. I guess the best thing to do is to request that my employer deducts taxes from my overtime pay. I see that it will cause more work for them but it will save me the hassle of being subject to penalities if I get audited. Sound reasonable?


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## Homerhomer (Oct 18, 2010)

MoneyGal said:


> He's going to be subject to the highest rate anyways.


True, didn't think of the personal services business.

Either way the best option in this cirumstance is for the company to start remitting proper deductions and leave everything else alone ;-)


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## Homerhomer (Oct 18, 2010)

cynbad said:


> Thank you very much for the helpful insight. I guess the best thing to do is to request that my employer deducts taxes from my overtime pay. I see that it will cause more work for them but it will save me the hassle of being subject to penalities if I get audited. Sound reasonable?


Yes ;-)

Except, it actually doesn't create that much work for the employer, all they have to do is enter the over time pay into their payroll system and that's it, the deductions are done automatically, and in this case actually the employer should be more concerned than you with being audited because they are the once not doing it correctly, you are simply reporting as they are presenting it to you, part T4, and the reminder as other income, they should include all of it on the t4.


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## MoneyGal (Apr 24, 2009)

OR make an offsetting RRSP contribution, or lots of charitable donations.


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## dotnet_nerd (Jul 1, 2009)

Cynbad, here's another issue you have to face. Even if you did decide to go ahead and incorporate CRA _could_ disallow all your deductions and deem you to be an employee, even if you are incorporated. 

You didn't mention what job you're in but back in the late 90's a lot of I.T. workers were doing just that; setting themselves up as incorporated contractors and enjoying great tax advantages. Myself included. However CRA started cracking down on this. I had a friend who was audited and had to pay huge back taxes and penalties because CRA consider his working status as regular employment, even though it was technically a corp-to-corp billing arrangement. 

CRA has guidelines that look at your so-called corporation activity such as:
-how many clients do you have, just the one?
-who determines your work hours?
-who's computer/equipment do you use, your own or the company's (in the case for IT workers)
-do you report to a "boss" or are you truly independent?

IOW are you really just a glorified employee wearing a "corporate" hat?

If it looks and quacks like a duck...

So be careful if you choose this avenue. In my case I was ok because I did have multiple clients plus I sold some of my own software products. But a lot of IT people landed in hot water back in the heyday of Y2K and the dotcom boom.

You might be ok though and fly under their radar. 

Just sayin...

HTH


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