The Enlightened Entrepreneur: Pay Less Taxes Through Your Corporation

“In this world, nothing is certain except death and taxes.” – Benjamin Franklin

While Benjamin Franklin’s above quote still rings true today, perhaps what isn’t such a certainty – or at least doesn’t have to be – is the amount of taxes that has to be paid.

From leveraging low corporate tax rates to income-splitting with a family member, there are many tax-saving options available to you when you incorporate your business.

Leveraging the corporate tax rate

When you incorporate your business, you can pay yourself less and invest your business’ profits through your corporation, which enables you to leverage the lower corporate tax rate (12.2% for the first $500,000 in 2021, compared to 52.75% for the top 2021 marginal personal income tax rate in Ontario). 

Below is an example of how employing this strategy can lower your overall tax bill.

Tax situation prior to incorporating (using 2021 tax rates):

Original salary = $200,000

Income tax payable = $69,239 (avg. tax rate = 34.62%)

Net income = $130,761

Tax situation after incorporating (using 2021 tax rates):

New salary = $120,000

Income tax payable = $32,136 (avg. tax rate = 26.78%)

Net income = $87,864

By keeping the $80,000 difference (between your original salary and your new salary) in your corporation, you will only be taxed 12.2% on that profit:

Corporate tax payable = $80,000 x 12.2% = $9,600

Total tax payable = $32,136 + $9,600 = $41,736

As a result, by choosing to pay yourself a lower salary and keeping profits within your corporation, you will have saved almost $30,000 in taxes!

Choosing how to pay yourself

Another benefit to incorporating is choosing how to pay yourself – either through dividends or salary – and how much. 

As shown above, by paying yourself a salary, the full income you receive is subject to your marginal income tax rate. However, as a shareholder of an incorporated business, you can instead pay yourself in dividends, which are taxed more favourably than income. If you have few alternative sources of income, up to $40,000 can be paid out through eligible dividends without incurring personal income taxes.

Deducting business expenses

Once you’ve incorporated your business, you will be able to deduct a number of business expenses from your taxes, including advertising, accounting, and insurance – as long as these items are all related to your business.

If you primarily work from home (more than 50% of the time), you are also eligible to apply for home office deductions, such as a portion of home insurance, Internet services, property taxes and mortgage costs, utilities, and repairs and maintenance. Capital costs or fixed assets – buildings, vehicles, equipment, and computers – are partially deductible, meaning you can write off a portion of these costs each year.

In addition, personal medical expenses can be deducted by using pre-tax corporate earnings through the Health and Welfare Trust (HAWT) program. 

Deducting as many business expenses as possible means lowering your corporate profits, and thus your overall corporate taxes. It also allows you to take a lower salary to pay for these expenses, lowering your personal income taxes, as well.

Income-splitting with your spouse (or other family members)

If your spouse or another family member is an employee of your business, incorporating will allow you to income-split with this family member. Your corporation will deduct their salary as a business expense and the family member will pay taxes on their own personal income tax rate, which would be substantially lower than your own. 

You can also add a family member as a shareholder of the corporation and pay them dividends, which are taxed at a reduced rate.

By income-splitting, you are able to keep your household income at the same level or higher, while reducing your household’s overall tax bill.

While lowering your overall tax bill is certainly an enticing feature of incorporating your business or practice, there are a number of other benefits I will discuss in future blog posts. Stay tuned for Part Three of the series on how to maximize your investment returns through your corporation.

This blog series is based on my recently posted white paper, The Enlightened Entrepreneur: Achieving Your Financial Goals through Your Corporation. If you would like a comprehensive guide to why and when you should incorporate your business, as well as how to take full advantage of an incorporated business, click here to receive a free copy of the full white paper.

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete.  It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities.  The views are those of the author, Matthew Lekushoff, and not necessarily those of Raymond James Ltd.  Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision.  Raymond James Ltd. is a Member - Canadian Investor Protection Fund.