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The Decision To Incorporate Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice. The decision to incorporate, both from a legal and a tax point of view, has the effect of separating the business from its owners. This means that, in order for incorporated business income to be made available to the owner, it must go through two levels of taxation. First, the amount of taxes payable applicable to the corporation will be determined. Then, when any remaining amounts are distributed to the owner, additional personal taxed payable on the dividends received will need to be calculated. The amount of dividends that can be paid by the corporation will be influenced by refundable taxes. In terms of tax advantages resulting from incorporating business income, there are three possibilities. In simplified terms, they can be described as follows: Tax Reduction - In some situations, the total taxes that would be paid at the combined corporate and individual level will be less when the business is incorporated than would be the case if the individual had earned the business income directly as an individual proprietor. Click HERE for Individual and Corporate tax rates in Alberta. Tax Deferral - If the amount of taxation at the corporate level is less than the individual would have paid on receiving the income directly, there is a deferral of taxation on amounts of income that are not distributed by the corporation. Note that this is an advantage only if the individual does not currently need the income. If the income must be removed from the shelter of the corporation, the analysis of this decision should concentrate on whether there is an actual reduction in total taxes through the use of a corporation. Stated alternatively, the advantage that may be associated with using a corporation to defer taxes payable is only available on that part of income that remains in the corporation. Note that, as is the case with all deferrals, if the process results in personal taxation eventually occurring in a period when the individual is subject to lower rates of taxation, the deferral of taxes can result in an absolute saving. Alternatively, if in such later periods higher rates of taxation are applicable for the individual, the result will be additional payment of taxes. Income splitting (One Way To Eliminate Tax) - Even in situations where the use of a corporation neither reduces nor defers significant amounts of taxes, the arrangement may be attractive from the point of view of income splitting. Among family members, it is not uncommon to find some individuals earning amounts far above their level required to put them in the maximum individual tax bracket, while other members are in lower brackets or earning such small amounts that they are not subject to any taxation. Because of the progressive nature of our personal tax system, the redistribution of income within such a family group will usually result in significant tax savings. A corporation can be used very effectively to achieve this goal. Click HERE for more discussion on Income Splitting. Click HERE for more discussion on Tax Planning Using Corporations.
Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice.
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