It’s that time of the year again.
It’s rainy and it’s getting cold.
For accountants, it’s the less busy time of the year.
Many of us use this less hectic time at various professional development courses to update ourselves.
It is usually during these courses that we are told that corporations do not help us save taxes, especially if you hold investments such as real estate and others!
This is because in Canada, there is something called Tax Integration! The objective of our income tax system is to tax you the same amount regardless of the form of ownership.
The calculation done today is based on current year, current income.
If you earn $100K in your corporation and declare it as dividend to yourself in the same year, you will be taxed, more or less, the same amount as if you earn this $100K directly in your personal name. That is roughly $26K of income tax payable if you earn the $100K directly in your own personal name.
The beauty of having a corporation means that you have a choice to leave the income into the corporation until you need it personally.
Say you really only need $40K for your personal expenses in the current year, you pay $5,823 tax in Ontario. The corporation pays 15.5% tax on the remaining $60K, corporation pays $9,300 in the current year.
Next year, you may need the remaining $51,700 (profit after paying tax at the corporation level). You can then declare a dividend to yourself for $51,700. You then pay $3,133 of tax in year 2.
A combined income tax payable of $18,256, compared to $26K if you were to earn it in the same year. $8K tax savings. Who wouldn’t want that?!?
You’re essentially using a corporation to split income with yourself, in multiple years.
Say you have a lower income spouse, an adult child or parents who are in a lower bracket, you can even split income by making them a shareholder to further lower the liability.
A few months ago, I met with a couple to map out their tax planning strategies. The husband owns a small business in the form of a corporation and the wife is a professional that earns a 6-figure salary.
They want to maximize their after tax dollars and they want to invest in real estate.
On top of the income splitting flexibility mentioned above, this couple can even use higher after tax dollars to invest in real estate because active business income is taxed at 15.5% .
When you make a decision on whether you want to incorporate or not, make sure you speak to us, professional accountants, to understand the long term potential and flexibility associated with the corporation first.
Until next time, happy Canadian real estate investing!
Cherry Chan, CPA, CA
Your real estate accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.