Private Canadian Corporations and Taxes – The Basics

For those of you with personal businesses that are growing, it may come to the point where you will want to incorporate. There are numerous benefits of setting up a private corporation for your small business, among them include:

  1. Litigation protection.
  2. Lower business income tax.
  3. The ability to sell your business up to $750k tax free ($1.5 million tax free if joint ownership with spouse)
  4. The added ease of selling/transferring your business if/when the time comes.

The above benefits are explained in detail in the post about whether or not you should incorporate your business.

Lets talk more about number 2, the lower business income tax. As a side business, many people believe that incorporating will result in a big tax break. This is true for the business income only. Once the money is withdrawn in the form of salary or dividends, it works out to be about the same as if the income was earned in your personal hands. As a side business though, the largest benefit of corporations with regards to taxation is tax deferral and the ability to keep more of business income out of the government hands initially so that it can grow over time.

How low is the small business private corporation tax rate? According to Ernst and Young, here are the 2008 private corporate tax rates sorted by province (federal and provincial combined):

Province Tax Rate on <= $400k income/yr
Tax Rate on > $400k income/yr
NL 16.00% 24.50%
PE 14.20% 35.50%
NS 16.00% 35.50%
NB 16.00% 35.50%
QC 19.00% 30.90%
ON 16.50% 31.50% (>$500k)
MB 13.00% 32.50%
SK 15.50% 29.50% (>$500k)
AB 14.00% 29.50%(>$460k)
BC 14.50% 30.50%
NT 15.00% 31.00%
NU 15.00% 31.50%
YT 15.00% 22.00%

As mentioned above, these low income tax rates are great if company earnings are kept within the business accounts and not withdrawn. It allows low taxation and the money can be invested in the markets.

Tomorrow we’ll go through a couple of corporate tax scenarios to see if there is a tax efficient way to withdraw corporate income.

Please note that i’m not an accountant or tax professional. Use the information above at your own risk.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Rodney Thibeau
8 years ago

In regards to investing withing the corporation. One should look that the benefit of buying a whole life par insurance policy- not universal life- due to market conditions.

A par life insurnace policy grows tax deferred, and cash valuethat is declared is also tax free – by a colleteral loan and the death benefit is tax free. Is should be corporately held, paying less tax dollars from the company to fund it rather than personally funding it. So for example, with my company there is a product called 20 pay life, which you pay the premium for 20 years, after 20 years is all paid up. Every year the company pays a dividend, which our company has been paying a dividend since 1886, right now the dividend is 6.9%, once that dividend is declared every year, you can’t lose it.

So for example a 40 year old male, invest 25,000 a year into a life insurance, takes the money from the company. The life insurance is owned by the company. At 65, the cash value of this illustraion is 1.1 million which has grown tax deferred for 25 years. The death benefit is 2.7 million which is tax free. The policy is paid up in 20 years. The cash value that you have at 65 is tax free through a colletaral loan from the bank, which happens all the time. So now you were able to pull out 25,000 a year from your holding company to fund a policy that was owned by your company so no tax on withdrawing the money because it’s still part of the company. Now it total you took out 500k over 20 years and getting 1.1 million tax free. Easy way to shelter money.

I know the concept may be difficult to undertand for some, but it works. Just think for business owners that puts money away in a GIC every year, on passive income from the company the tax rate on that growth is 51.7% in nova scotia, so why not put the money into a tax shelter vehicle like life insurance. There are only so many things that are tax shelter, your home, RRSP, TFSA and life insurance. Life insurance is the only one that has no limit on what you can put in. It all depends if your insurable.

This is one way to get money out of a company tax effectively…. Corporately Funded Life Insurance – Par products

Little Ms.Scrooge
12 years ago

Hello all
If there is any body still looking for info on Universal Ins. here is a link

Tax Resource
12 years ago

There are some good points in the artice and The Financial Blogger brings up an interesting point, which is deductions. If you were a sole proprietorship, the same deductions are available.

Also, the intergration of small business and personal income tax that for the most part reduces the ability to realize any savings from deferral or tax savings on investment income.

12 years ago

The cost for CGL insurance for a sole prop varies very widely, because the actual risk depends in large part on the actual business being carried out- a low risk business, such as a small interior decorating operation, would only pay a fraction of the cost of a construction or contracting operation.

Most brokers that arrange insurance for incorporated businesses can also offer it to sole proprietors- corporate status usually isn’t a requirement (or at least not when I last checked-about 2 years ago). Check with Anthony and Wedgwood- I have had good experiences with both. You could also check with Johnson, although I’m not sure whether they offer commercial coverage.

12 years ago

@Cannon_fodder – Limited liabilty is certainly a great reason to incorporate, but it’s important to know that a corporation doesn’t fully absolve you of liability. I discussed this in my post Should I Incorporate?. Given that a lot of smaller operations would (or should) have CGL insurance anyway, sometimes incorporating just isn’t worth it.

12 years ago

My brother-in-law has his own business (motorcycle repair shop) and he only now is getting incorporated. I always thought that the liability protection provided by incorporation would be all he needed to justify the expense.

The Financial Blogger
12 years ago

the trick is to use your company to pay for expenses. There are no benefit to pay 19% (in my case ;-) ) within your company and then, another 30% in dividend ;-)

The good news is that Canadian Gov created several laws so the incorporation can pay several expenses that the individual can benefit as well without being taxed (legally off course!!!).

I’m actually preparing a post about that ;-)

12 years ago

I’d like to echo Thicken’s remarks: Running a corporation is a lot of work (I run a couple of them). Unless you are willing and able to do all of the regulatory filing yourself (minute book, GST returns, annual financial statements, tax returns, etc), you will end up paying a professional as much or more in fees than you would make in any sort of tax savings, unless you run a sizeable corporation with good revenue. If you are setting up a corporation with the primary aim of dodging some tax, tread carefully, as the government is wise to a lot of schemes. Have a legitimate business that you wrap your corporation around, then take advantage of the opportunities that incorporation affords you.

Thicken My Wallet
12 years ago

I would emphasis your mention of the cited tax rates is for “business income only” means you can’t set up a holding corporation, hold shares and bonds and do nothing else and be eligible for the low corporate tax rate. In this case, the corporation is making “passive income” and is subject to taxation at the highest marginal tax rate (approaching 50% in Ontario).

Mark- try this link, it even cites the section of the Income Tax Act:

I would also make this point- people under-estimate how much administration is required to run a corporation. There’s a lot of bureaucracy involved and you have to weigh the opportunity costs of sitting on a Sunday afternoon doing your books with the tax savings.

The tax savings only become significant once your taxable income is quite high too so if you make $60K as an employee and $65K of taxable income in a corporation, it may not be worth it (remember that a lot of business deductions available to corporations are also available to sole proprietors). Corporations are great tax-planning tools if you have significant taxable income (especially if you have families to spread the tax burden). Otherwise, it could be not be worth it. In other words, speak to your profession before you incorporate to see whether the pros outweigh the cons.