The magic of sprawl

It's possible to control your taxable income.

Entrepreneurs may choose to run their business on a personal basis. In this case, they will be taxed annually on their profits.

The Canadian tax system is structured so that individuals are subject to progressive tax rates: the higher the annual income, the higher the marginal tax rate. This can be as high as 53%. A high level of income not only increases our tax rate, but also reduces access to certain social programmes.

The entrepreneur could choose to operate the business as a joint stock company, which means paying generally lower corporate tax on the annual business profit, and personal tax on the withdrawal of the company's surplus.

Ever heard of the magic of averaging? It's an entrepreneur's ability to control the level of personal taxable income by incorporating as a corporation. In other words, you split your income with yourself over time. Moreover, if the company returns the surplus to the shareholder in the same year it earned it, no savings are made; the magic doesn't work.

Thanks to the legal entity of a joint-stock company, entrepreneurs can control their personal taxable income, since they choose when the company remits surpluses to them. In this way, they can level out their annual personal taxable income, which, because of the progressive nature of the rates, can generate significant savings. Postponing capital withdrawals until the shareholder's retirement, when their other income is very low, can result in substantial tax savings.

Any questions on the subject? Contact us, we can help.

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