A level is an instrument designed to indicate whether a horizontal surface is truly level or if a vertical surface is truly plumb. You want to start with the proper level, or corporate structure, before you build your business, and as your project grows keep checking the level to see if you are in the right structure or need to change your corporate makeup. Use the level often as your project grows in size to avoid it toppling over. As you start off your business, if you are off by a bit, it is no big deal, but as your company gets more successful, not having the right corporate structure can be a big problem.
The income tax act in Canada is now more than 1,500 pages long and changes with each new budget passed. Keeping current can be a challenge. Whatever strategies you consider implementin
g, do so with a team of advisors such as your lawyer, accountant and financial planner. That said, let’s begin.
In Canada there are three main types of corporations for tax purposes:
- Public corporations that have shares listed on a stock exchange.
- Private corporations that reside in Canada and are not public corporations.
- A Canadian Controlled Private Corporation (CCPC) is a private corporation that is not controlled either directly or indirectly by one or more non-residents. We will focus on the CCPC as that is the entity of many owner-managed companies.
Corporations are taxed based on the type of income they earn.
There are five main types:
- Active income is generated by the day-to-day running of the business, on the first $500,000 earned.
- General income is active income over and above the small business deduction.
- General, manufacturing and processing income.
- Foreign income.
- Investment income, taxed differently from active and general income.
The highest marginal tax rate in Ontario has been increased to 49.53 percent for income over $220,000 in 2015, and 47.97 percent for income of $150,000-$220,000. There are a number of strategies to split and spread this income. For the purposes of this book we will assume most Ontarian high income earners fall into the 46.41 percent rate with personal net incomes of $138,587 to $150,000.
The combined federal and Ontario general corporate tax rate for CCPC on earnings below $500,000 is 15.5 percent, and 26.5 percent on earnings above $500,000.
Recently, we have seen an increase in personal tax rates with a decrease in corporate tax rates resulting in greater value to keep after tax profits within the business.
Tip: If you don’t need to remove it to cover your living expenses, keep your money in your corporation as it is taxed at a 15.5 percent rate versus your personal tax rate of 46.41 percent. Because of this you have about 85 cents per dollar left in the corporation to invest versus about 53 cents after tax to invest personally.