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Bonusing Down to the Small Business Limit
A very useful tax planning technique for Canadian Controlled Private Corporations (CCPC's), is to annually bonus down the taxable income of the corporation to the Small Business Deduction Limit. This means the corporation pays an additional salary to the shareholders, which is deductible to the corporation and regular salary income to the shareholders, in order to optimize overall tax efficiencies.
Click HERE for more discussion on deferring taxes with Bonuses.
Income taxed in the corporation above the Small Business Deduction Limit can be efficient from a cash-flow perspective, but is not efficient from an overall tax liability perspective. For example, the tax rate of a CCPC in Alberta at the highest tax bracket rate is lower than the highest tax bracket rate of individuals. Click HERE for the tax rate of corporations in Alberta and click HERE for the tax rates of individuals in Alberta. So why would anyone want additional salary income if the highest corporate tax rate is less than the highest personal tax rate?
The answer lies in the fact that at some point in the future, the corporation may be wound up or dissolved (which may create deemed dividends) or may pay normal dividends to the shareholders. Dividends are not tax deductible to the corporation, but are taxable to the individual. If you add the dividend tax to the corporate tax and individual tax, a different picture appears. The concept is called Integration and is explained HERE. In general terms, it is more tax efficient to bonus out taxable income of a CCPC in excess of the Small Business Deduction Limit.
There are some caveats to this philosophy. For example, cash flow may be tight and therefore a company may not want to bonus down its income in order to fully utilize the overall lower corporate tax rate. There are other problems such as CRA denying bonuses which is discussed HERE.
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