Why the Rich Get A LOT Richer with Corporations

Why the Rich Get A LOT Richer with Corporations

Jays are hot these days! 🙂 Watching their games can be stressful, thanks to Donaldson, they somehow managed to sweep the Texas Rangers.

Other than cheering to our favorite team, we also did a little bit of charity work this past weekend.

We were able to pull together a sufficient amount of money and effort to feed 153 families in Hamilton.

Thank you for all the people who registered for my class this upcoming Saturday.

Half of the donation went to Durham Basket Brigade, led by Quentin D’Souza and his group of friends. They fed 134 families this Thanksgiving, which was double the amount of the families they fed in 2015.

Half of the donation went into Hamilton Basket Brigade, led by Erwin Szeto, aka Mr. Hamilton, Roger Auger, James Maggs, Maria Marcuzzi and some other friends.

We took our kids out to deliver the baskets this time. Admittedly it was a bit of a struggle but we managed to do so.

Some of you may already know, my parenting style is “lead by example”.

Robin may simply enjoy seeing the Syrian family’s three kids saying hello to her when we dropped off the basket. Hopefully she will eventually understand what we are doing and appreciate what she has. 🙂

One of my family members is a professional, who has his own clinic. He’s not incorporated yet.

He is the sole breadwinner of the family.

He’s got an adult child, who’s still in post secondary school.

His wife also works in the clinic as well, making more or less $60K salary.

They are also real estate investors.

He probably nets about $400,000 to $500,000. (When I say net, it means the income after all the allowable deductions for tax purpose. This amount is the taxable amount that is subject to personal tax.)

Don’t get me wrong. I have a lot of respect for him and his work ethics. But when it comes down to tax planning, he’s really years behind.

Let’s use the following example to illustrate.

Husband Wife Daughter Total Family
Income    400,000.00    60,000.00        460,000.00
Tax    181,974.00    11,370.00        193,344.00
Net    218,026.00    48,630.00        266,656.00

Husband pays about $182K of tax on his net income of $400K. This $182K includes $5,089 CPP contributions (both employer and employee).

Wife pays about $11,370 of income tax.

Daughter can only make whatever she works for. Payment to daughter can be restricted and has to be reasonable based on the amount of work the daughter works in the clinic. In this case, the daughter does not work in the clinic and can’t earn any salary.

So their combined family income is $460K, tax is $193,344, net with $266,656.

Let’s start this ALL OVER AGAIN with a CORPORATION.

If the husband incorporates to hold his practice and opts to split income with his wife & his daughter using dividend, the company will have to first pay taxes on all the income.

(Yes, you can now split income with your daughter because she is a shareholder of the company. See my previous blog post about splitting income with other family members.)

Corporation
Income          462,544.30
Corporation tax            69,381.65
After tax available for dividend          393,162.66
Dividends declared          200,000.00
After tax income to invest in corporation          193,162.66

Note that the income inside the corporation is higher since we are opting to pay the wife a dividend instead of salary.

Husband Wife Daughter Total Family
Dividend          100,000.00    60,000.00    40,000.00        200,000.00
Tax            16,007.73      4,599.08          907.93          21,514.74
Net            83,992.27    55,400.92    39,092.07        178,485.26

Yep, after receiving the dividend income from the corporations for $200K, the family pays only $22K of tax netting $178K to spend.

Of course, this dividend income can go up or down, depending on how much they would need for their personal expenses.

Also, the money left inside the corporation to purchase properties is $193K, the money left personally after paying taxes is $178K, a combined total of $371K.

If you compare $371K to $267K after tax income when he reports everything in his own personal names, there’s a difference of $100K!!!! Per year!

This is the downpayment of one house, per year! 🙂

So why does he not incorporate?

Because the Canadian tax system is designed in a way that a taxpayer would pay the same amount of taxes whether you earn it in your corporation or in your personal name, he believes he would be paying the same amount of taxes regardless, so why bother?

Many entrepreneurs use their corporation as a way to retire, especially for those professionals who are not able to sell their business.

So instead of owning investment properties in your own names, you buy them in the corporation’s names.

When husband retires in 20 years, he can slowly take the money out from his corporations via dividends.

This can add up significantly. In fact, it is $100,000 per year difference.

If he uses all his money in the corporation to purchase houses ($193,162 per year), he is able to purchase two properties a year.

If he simply earns 10% interest on an investment fund, he can accumulate as much as $12M in 20 years before tax. $12 million dollars!

That’s the difference he’s not seeing.

For my realtors friends out there, please don’t ignore this post! You can incorporate too! I am actually in the process of helping my husband to incorporate as well. Stay tuned as I go through my process.

All the proceeds will go straight to feeding more families in the 2016 Christmas Basket Brigade in Hamilton.

Until next time, Go Jays GO and happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

Related Posts