• The business is incorporated and qualifies as a Canadian Controlled Private Corporation (“CCPC”)
• It operates in Ontario
• We are dealing with the 2011 taxation year

For the small business owner in Canada, there are two alternatives for distributing a company’s profit to herself:

1. She can pay out the profit to herself a salary
2. She can pay out the profit to herself as a dividend
3. A combination of both

We wish to make this post simple and understandable, so for the sake of simplicity, we shall only demonstrate alternatives 1 and 2.

Step 1

Let’s assume that the owner makes a profit of $118,343.20 before she pays herself anything. She has two alternatives: (1) she can pay it all out to herself as a salary and pay no corporate income taxes (since her net income would be reduced to $0; or (2) she can pay corporate taxes on the profit and distribute the remaining profit after taxes to herself as a dividend:

As you can see, if the owner decides to remunerate herself with a dividend, she would receive $100,000 of dividend income after her company pays corporate taxes at a rate of 15.5%. This is the 2011 tax rate for the first $500,000 of net income for a CCPC in Ontario.

On the other hand, if she pays out all of her profit to herself as a salary, she would receive $118,343.20 in salary income. In this scenario, she pays no corporate income tax since her net income after she pays out her salary is $0.

Step 2

Now let’s look at the personal income taxes payable on these two sources of income:

As you can see, the marginal tax rate on salary income is much higher than that of dividend income. Again, the above are personal tax rates for Ontario. But there’s one more tax that we forgot…

Step 3:

To summarize in the above table, the combined corporate and personal taxes paid using dividends ($32,254.20) would be lower than if she chose to pay herself with a salary ($35,265.00).

Moreover, if she paid herself a salary, she would be required to pay CPP premiums on her salary of $5,226.30. This represents the employer portion of $2,613.15 (paid by her corporation) and the employee portion of $2,613.15 (paid by her).

So the total tax she’d have to pay by choosing the salary option ($40,491.30 of corporate tax, personal tax & CPP premiums) would be $8,237.10 greater than if she chose to pay herself a dividend.

Conclusion

It would appear in the above (simplified) analysis that there could be some significant tax savings in choosing to pay yourself with a dividend instead of a salary. However, there are some things to be mindful of:

• You are only eligible for Canada Pension Plan benefits (upon turning 60 years old) if you paid into it in the first place.  CPP premiums are only payable on salary. Therefore, by paying yourself only dividends and not contributing to the CPP, you take the risk of having insufficient retirement income if things don’t work out as planned.

• Your RRSP contribution limit is calculated as 18% of your “earned income” (up to a maximum of $22,450 for 2011). “Earned income” does not include investment income such as dividends. Therefore, if you choose to pay yourself only with dividends, you won’t be able to contribute to an RRSP to reduce your taxes payable.

This post is for information purposes only and should not be interpreted as tax advice or a legal opinion. Please consult with us to review your own particular circumstances.

© Copyright Jenny Lin, 2010.

If you fail to file you tax return and/or fail to pay your income taxes to the Canada Revenue Agency on time, significant penalties and interest can be added to your tax balance owing. Moreover, the CRA has significant powers under the Income Tax Act (ITA) to collect outstanding tax debt. A brief summary is discussed below (for practical purposes we’ll assume that a 2009 tax return wasn’t filed or paid):

Penalties for Late Filing

• The penalty is 5% of the 2009 balance owing, plus 1% of that balance owing for each full month that the return is late, to a maximum of 12 months

• If CRA charged a late-filing penalty on the return for 2006, 2007, or 2008 the late-filing penalty for 2009 may be 10% of the 2009 balance owing, plus 2% of the 2009 balance owing for each full month that the return is late, to a maximum of 20 months

Interest on Taxes Payable

• If 2009 taxes were not paid on time or if there is a balance owing for 2009 on the Notice of Assessment, CRA charges compound daily interest starting May 1, 2010, on any unpaid amounts owing for 2009.

• In addition, CRA will charge you interest on any penalties, starting the day after the return is due. The rate of interest CRA charges can change every three months – depending on the prescribed interest rate  which changes quarterly.

Collection Powers

• Under Section 223 of the ITA, the CRA can register a lien over a debtors home (or any other real estate owned by the debtor). Once this lien is registered, it effectively functions as a charge on the property and can only be removed once the tax debt is paid in full.

• Under Section 224(1) of the ITA, the CRA can issue a “Requirement to Pay” to a debtor’s bank or employer (the “Garnishee”), requiring it to remit proceeds to the CRA in order to satisfy the tax debt. If the Garnishee fails to comply, it is personally liable to the CRA for the amount that should have been remitted.

The conclusion to this post should be clear: file your tax returns and pay your income taxes on time! This will save you a lot of money and headache…

This post is for information purposes only and should not be interpreted as tax advice or a legal opinion. Please consult with us to review your own particular circumstances.

]]> http://www.accountant-toronto.ca/blog/2010/12/bad-things-happen-if-you-dont-pay-taxes/feed/ 0 http://www.accountant-toronto.ca/blog/2010/12/disputing-a-notice-of-reassessment/ http://www.accountant-toronto.ca/blog/2010/12/disputing-a-notice-of-reassessment/#comments Tue, 28 Dec 2010 01:34:50 +0000 Jenny Lin http://accountant-toronto.ca/blog/?p=51 If your income tax return has been reassessed by the Canada Revenue Agency with the outcome that you owe significantly more taxes than you initially thought, here is a list of steps for filing a Notice of Objection:

• First, contact the CRA and meet with an accountant to determine why you’ve been reassessed.  You may conclude that certain deductions were not valid.  On the other hand, you might decide that the reasons for CRA’s reassessment was unreasonable and that you want to appeal their decision further.

• If you do decide to object to the reassessment, you must file a Notice of Objection with the Appeals Branch of the CRA. This can be in a form of a letter to the Chief of Appeals. Here is a sample letter from CRA’s website:

• Send the Objection promptly – the time limit is 90 days after Notice of Reassessment was mailed to you, or one year after the filing deadline for the tax year in question (e.g., 30 April 2011 for your 2010 tax return).

• The objection should briefly state what you’re objecting to and why.

• The Objection should include the following information:

• Your name and address
• a daytime telephone number
• the date of your notice of assessment
• the taxation year (if applicable)
• your social insurance number or Business Number
• the facts and reasons for your objection
• all documents that support your objection; and
• the name and address of your authorized representative (if applicable)
• Your signature and the date.

• If you are successful, the Appeals Branch will agree that the reassessment was a mistake. On the other hand, if you are unsuccessful, they will send you a notice that confirms the previous assessment.

• If you aren’t fully successful in the objection, you can appeal the decision to the Tax Court of Canada.

This post is for information purposes only and should not be interpreted as tax advice or a legal opinion. Please consult with us to review your own particular circumstances.

© Copyright Jenny Lin, 2010.

A professional incorporation (P.C.) allows many of the same tax advantages enjoyed by other incorporated self-employed individuals with two very important differences:

• professional liability is not limited through incorporation; and

• shareholders of a P.C. are restricted to members of the same profession – this takes away the strategy of income splitting by having family members hold shares of the P.C. unless they are members of the same profession

Role of Governing Bodies:

The governing bodies of regulated professions are responsible for the certification and licensing of professional corporations that fall under their jurisdiction. In addition, the governing bodies will be able to  pierce the corporate veil of a P.C. and hold the professional shareholders accountable for their actions.

Naming a Professional Corporation:

The name of the professional corporation must include the words “Professional Corporation” and cannot be a numbered company.

Share Ownership Restrictions

The professional incorporation legislation allows one or more members of the same profession to be shareholders in a P.C. All officers and directors of the professional corporation are required to be shareholders of the corporation.

Business Activities Undertaken:

The P.C. may not carry on a business other than the practice of the profession.

Professions Affected

Members of the following professions would be eligible to operate a professional corporation:

• Chartered accountants under the Chartered Accountants Act; certified general accountants under the Certified General Accountants Association of Ontario Act; and lawyers under the Law Society Act (responsibility of the Ministry of the Attorney General).

• Audiologists, chiropodists including podiatrists, chiropractors, dental hygienists, dental surgeons, dental technologists, denturists, dieticians, massage therapists, medical laboratory technologists, medical radiation technologists, midwives, nurses, occupational therapists, opticians, optometrists, pharmacists, physicians and surgeons, physiotherapists, psychologists, speech language pathologists, and respiratory therapists under the Regulated Health Professions Act (responsibility of the Ministry of Health and Long-Term Care).

• Social workers and social service workers under the Social Work and Social Service Work Act (responsibility of the Ministry of Community and Social Services).

• Veterinarians under the Veterinarians Act (responsibility of the Ministry of Agriculture, Food and Rural Affairs).

Establishing a Professional Corporation

Regulated professionals who wish to incorporate their practices should consult the Companies Branch of the Ministry of Consumer and Business Services for Ontario incorporation requirements, and their governing body for conditions of incorporation specific to their profession.

This post is for information purposes only and should not be interpreted as tax advice or a legal opinion. Please consult with us to review your own particular circumstances.

© Copyright Jenny Lin, 2010.

• There is a small business deduction that applies to the first $500,000 of “active” business income.  Generally speaking, “active” business excludes income from property and capital gains, so items like interest and rent are not active business income. Here are the 2011 rates for a CCPC in Ontario:

In contrast, a businessperson operating as a sole proprietor with taxable net income of $500,000 would be paying a marginal tax rate of 46.41% in 2011.

• There is a $750,000 lifetime capital gains exemption which applies to the sale of shares of a CCPC. Therefore, a businessperson who sells her shares in the business for a profit of $750,000 will not pay tax on the capital gain.

Definition of a CCPC

In simple terms, for a corporation to be considered a CCPC, it must meet all of the following criteria:

• it is a corporation that is resident in Canada.
• it is not controlled directly or indirectly by one or more non-resident persons.
• it is not controlled directly or indirectly by one or more public corporations.
• it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada.
• it is not controlled directly or indirectly by any combination of persons described in the three previous conditions.
• no class of its shares of capital stock is listed on a designated stock exchange.

From reading the above, there are clear tax advantages to incorporating a business as a qualified CCPC. Should you wish to discuss your situation with us, please contact us for a consultation.

This post is for information purposes only and should not be interpreted as tax advice or a legal opinion. Please consult with us to review your own particular circumstances.

© Copyright Jenny Lin, 2010.

If you expect your business to incur debt as part of its operations (for example, you would regularly purchase of inventory or equipment on credit) or your industry is known to be highly litigious (i.e., there may be a good chance you can be sued someday), then you should consider incorporating your business.

What is a corporation? A corporation is a legal person, as a opposed to a “natural person” like yourself. It can purchase assets, incur debt, file lawsuits or be sued just like a “natural” person. It has many of the same rights as a natural person. Corporations exist as virtual or fictitious persons, granting limited protection to the actual people involved in the business of the corporation. This limited liability is the major advantage of incorporating your business.

So why is the protection “limited” and not “absolute”? Because a director of a corporation (who is usually also the shareholder who owns the company) has personal exposure to certain statutory business debts, such as:

• HST collected by your business but not remitted to Canada Revenue Agency
• Payroll taxes deducted from your employees’ wages, but not remitted to Canada Revenue Agency
• Employer premiums for EI and CPP
• Up to 6 months unpaid wages and vacation pay of your employees

Also, if you gave any personal guarantees to any of your business creditors, for example, the bank for your loan or your landlord when you signed the lease agreement, incorporating your business will not protect you personally if you fall behind in these obligations. Therefore, to the extent possible, negotiate your way out of giving any personal guarantees for your business.

The easiest way to incorporate is to see a lawyer, who will prepare, have you sign and register the necessary documents to incorporate your business. Unfortunately, between legal fees and government registration fees, it costs quite a bit more to incorporate compared with registering a sole proprietorship.

This post is for information purposes only and should not be interpreted as tax advice or a legal opinion. Please consult with us to review your own particular circumstances.

© Copyright Jenny Lin, 2010.

Are You Eligible?

CRA’s Guide T4002 tells us you can take the home office expense tax deduction if you meet one of the following conditions:

1. It is the principal place of business; OR

2. The space is used exclusively to earn business income on a regular AND continuous basis for meeting clients.

Expenses Deductible

The Canada Revenue Agency has a Form T2125, which can be found here. On that form is a list of eligible home office business expenses. Here is a snapshot of the list from Form T2125:

Once you have gathered the eligible home office expense original source documents as listed on form T2125 … which include utilities including water (but not your telephone), maintenance and repairs, insurance, property taxes, rent, mortgage interest … you must prorate them to your office space.

For example, if you have a home office that is 10 by 10 feet in a house that’s 1800 square feet. Then your calculation of allowable portion of business-use-of-home expenses would be: 100 divided by 1800 = 5%.

Finally, you cannot use the business-use-of-home expenses to create a business loss, so your deduction can’t be more than your net income before you deduct these expenses. If it’s more, you can carry the amount of these expenses forward into the next year.

This post is for information purposes only and should not be interpreted as tax advice or a legal opinion. Please consult with us to review your own particular circumstances.

© Copyright Jenny Lin, 2010.