We all benefit from the exchange of information. Please feel free to email your questions and comments:I am looking at buying a car and the salesman told me I could buy it through my company and get a write-off?
The income tax rules for company vehicles are extremely complicated and onerous. Purchasing a company vehicle can work if you have other vehicle(s) that you own personally and you can say that the company vehicle is used 100% for business purposes (and justify this with a log). However, if not, you can be assessed on your personal income tax for personal use of the company car. This can amount to 24% per annum of the original cost of the vehicle so it is significant!
To avoid this issue, I usually recommend buying the vehicle personally and charging the company for business use.
There are some tax advantages to leasing equipment, but the decision to buy or lease should be based on the best deal available. Tax implications are secondary - you do not want to pay out more money to save tax! There are web sites that will help you with buy/lease decisions. You can find one of these in the links section of this website.When should I apply for CPP?
How long should I keep my records?
Regular taxpayers are eligible for CPP benefits at 60. You should receive a Statement of CPP Benefits in the mail showing your projected CPP benefit at ages 60, 65 and 70. I recommend that you do the arithmetic and calculate the break even age. That is, if you will receive $500 at age 60 and $700 at 65, you will break even at age 77. Please contact me if you have trouble following the arithmetic.
Once you have calculated the break even age, ask yourself whether the additional $200 per month at 77 is worth postponing the benefit for five years. It will of course depend a lot on personal circumstances but I believe generally, you should take it sooner rather than later.
For those who have their own companies, things are more complicated. CPP is payable on any salary received. At the maximum level of $57,400, the total cost to the owner/manager is about $5,500 annually. This of course increases future CPP benefits, but a private company owner should evaluate the salary/dividend options.
Please refer to the Retirement Income Calculator in the links section and also the FAQ "Are dividends or salary more tax efficient?"
How much can I pay my spouse and/or kids?
The general rule is that you should keep your records back seven years. However, it also depends on when you filed your taxes and received your notice of assessment. As a practical matter, it is often useful to have records that go back farther than seven years, for example, if you want to substantiate the purchase price of an investment. Although I have never seen CRA go back any more than three or four years, if in doubt, keep the records!
Are dividends or salary more tax efficient?
The obvious answer is "how much are they worth?" On audit, CRA will look at what you would pay another employee to do the same job. Paying your twelve-year-old son $30,000 for consulting services would probably be unreasonable, but perhaps he is a computer guru. Paying your spouse $30,000 would probably be acceptable, depending on his or her background, credentials, and duties.
The courts have also ruled that proper deductions, employee remittances, and reporting are necessary to support any salary payments.
Should I incorporate?
This will depend to a large extent on how much income is taken personally and the net income of the company. Personally, at lower income levels, there is minimal tax on dividends (assuming no other income). The company will pay its basic tax (currently 11-12% for active business income) - however, since the minimum personal tax rate on salary (in excess of basic deductions) is 25%, overall this is a pretty good savings.
However, rules and rates are constantly changing. The details are complicated, but bottom line is that you should monitor the situation if you want to minimize tax.
Another factor is that there is no CPP on dividends. CPP has become increasingly expensive - about 10% of salary including the employer portion. Some people like the idea of paying CPP, knowing that they will get it back in future. Again refer to the Retirement Income Calculator if you want to find out the effects of opting out of CPP.
Also be aware that dividends are not considered earned income and therefore do not build up RRSP room. However, overall, I see more owner/managers opting for dividends to improve their current cash flow.
Please make this decision carefully - I have seen many unnecessary companies over the years. Regardless of how much a business makes, if the owner wants to withdraw all funds generated, incorporation has no income tax benefit. Although it is sometimes useful to have a company for liability protection, check whether proper insurance will suffice.
Incorporation adds another level of complexity which increases your CRA reporting requirements and your accounting fees - see my "Do It Yourself" Accounting article.
In many cases, it is preferable to start as a proprietorship and then incorporate after the business starts earning sufficient income. Transferring or selling assets from a proprietorship to a company can be complex or relatively straight-forward depending on dollar amounts and/or type of assets. You will need professional advice to work through it.