Thursday, October 25, 2012

Investment Income in a Corporation

In most case, hold your investment and earn investment income in a corporation could cost you more taxes than holding it personally. In some case there is no tax deferral benefit but tax prepayment.  In British Columbia, say you are in the highest tax bracket, additional of $1,000 investment income earned by the corporation instead of earning it personally can cost you $19 more of taxes.  If you choose retaining the surplus in the corporation, it results $10 of taxes prepayment. Caution should be particularly taken when investment is held in a corporation carrying on an active business.  Also there is the potential for double tax, especially on death.

But other potential benefits do exist:

  • Protection of assets from creditor
  • Reduction or avoidance of probate fees
  • Protection of assets from U.S. estate tax if the property situated within U.S.
  • Control over the timing of dividend payments to maximize Old Age Security (OAS) benefits

Sunday, October 21, 2012

Incorporation of Small Business

Incorporating your small active business could save taxes to you due to small business deduction and dropping of the corporate tax rates.  In British Columbia, say you are in the highest tax bracket, additional of $1,000 income earned by the corporation instead of by sole proprietorship can save you $10 of taxes.  If you choose retaining the surplus in the corporation, it will give you $302 of taxes deferred.  

But if all of your business’ profits can only cover your personal living expenses, or if you withdraw all of business’ profits, you may lose the benefits of incorporation from tax saving point of view.  But the incorporation can still provide you the benefits like:

  • Personal assets protection
  • Income splitting
  • Deferral of bonus income
  • Lifetime capital gains exemption

Sunday, October 7, 2012

Tax deferred is tax saved

Tax deferred means you can pay taxes at a later time when you are in a lower tax bracket; also by discounted tax dollars.

For example - You can distribute your own corporation surplus to you at a later time by way of dividends.

RRSP is another very popular tax deferral vehicle.