Because a company is taxed at a much lower rate on business income than an individual, there is the potential for a large tax deferral.
Consider a professional who earns $300,000, but only needs $200,000 before tax for personal use. If earned personally in BC, the remaining $100,000 would attract $44,000 of tax, leaving $56,000. If earned by the company, and not taken out, the tax will only be $13,500, leaving $86,500.
By leaving surplus funds in the company, income tax has been reduced by $30,000.
However, this $30,000 is only a tax deferral. Additional tax will be paid when the funds are removed from the company, either as salary or dividend. With proper planning, it may be possible to convert some or all of this deferral into an absolute tax savings.
Funds can be saved in the company, and then taken as dividends when the shareholders are in a lower personal tax bracket, usually after retirement. A person with no other sources of income will pay less than $750 in tax on a dividends of $40,000. If married and spouse also has no income, that’s over $78,000 after tax available for personal use.
There are other situations where the funds can be saved, and then taken out when more advantageous.
Money can be set aside in the company until children turn 18 and are no longer subject to the kiddie tax.
Corporate savings can also be used to fund an extended period of disability. Disability insurance payments are usually non-taxable, so it’s possible that there can be a few years of low income that can be topped up with dividends from the company.
Company savings can also be used to fund other low income situations such as maternity leave or a sabbatical.
Finally, the extra funds in the company can be used for investing.
In my next posts, I’ll explain the taxation of investment income in a company, and illustrate how the tax deferral allows you to end up with more money, even after taking it out of the company.
- Incorporation – A Brief Introduction
- Professional Corporations in British Columbia
- Professional Corporations – Why Incorporate?
- Incorporation Benefit – Lower income Tax Rates
- Incorporation – Taxation of Salary and Dividends
- Incorporation Benefit – Income Splitting
- Income Splitting with a Professional Corporation can Save You Thousands