The corp

A few offhand comments here yesterday upset a bunch of people. This is a good thing. Sometimes conventional wisdom is unwise. And so (I have found in my time) are a slew of accountants.

This post is about being self-employed, having a corporation, taxation, the Trudeau government’s hate-on for you, and how you should pay yourself. If you’d rather read about dogs and what a bunch of scuzzbuckets Royal LePage just proved to be, come back on Sunday.

Yesterday, in the course of dissing Ashley the debt-loving lady doc in Burnaby, I mentioned that professionals with corps often make the classic mistake of taking income only in dividends and amassing funds inside their personal companies. “I was caught off-guard by your comment regarding dividends vs salary/pay.  Can you elaborate?,” writes a famous and wealthy medical entrepreneur who nonetheless comes here. “I was of the mind that if I can keep more money in the corp, it can be invested before it’s taxed at a higher rate, and then paid out of the corp in the future when I’m retired.”

This is what so many accountants tell you, simplistically and without spelling out the downsides. It’s also worth remembering that these numbers guys are paid more with every extra complexity added to your business structure. This week I’m helping rescue a poor guy from the clutches of a national accounting firm. He scored a $2 million windfall working for a startup, sought accounting help, and ended up with a holdco, an opco, a family trust and an investment corp within the trust. Oh, and $25,000 in annual fees. Yikes.

Well, first, only incorporate if it makes financial sense. A gross income of about $500,000 justifies incorporation and paying the annual reporting fees, but with less than that coming in seriously consider a sole proprietorship instead. It costs nothing to set up, takes 10 minutes and allows you to claim the same expenses. You can use TurboTax to file taxes and save yourself three grand a year.

But some people have to incorporate – like IT guys whose clients demand it, or doctors/lawyers working in certain capacities or structures, paying for staff, or simply billing enough to benefit from operating through a corp. The big myth is that if you pay yourself in dividends rather than salary, you’re gaming the system.

Nope. You’re not.

When corps make income, they pay tax. The money left over can be taken by the shareholder in the form of a dividend. S/he then gets to claim the dividend tax credit and appears to pay less tax than if the same funds has been taken as salary. But when you add the corporate and personal tax paid (both by you) it’s the same as if you’d just claimed salary. Remember that the corp can deduct all salary from income, possibly reducing its taxes to zero.

Moreover, taking a dividend means no RRSP room. That sucks. Entrepreneurs (including docs and lawyers) don’t have corporate pensions, defined-benefit pensions, profit-sharing or group DC plans. They need RRSPs to grow money tax-free, allowing retirement income to be controlled. Taking a salary can earn you over $26,000 in room, fully deductible. Do not forego this incredible shelter.

Of course collecting dividends also robs you of CPP benefits. Yes, you don’t make premium payments (which are double) but consider that between age 60 and 85 the government is willing to send you almost a quarter million dollars in CPP payments. Why toss that? Additionally, taking a salary instead of dividends is much more credit-friendly. Bankers are straight arrows. They drool over T4s. Chances of scoring a loan or mortgage augment with those slips in hand.

But the biggest reason to fear amassing money in a corporation by just sipping off dividends is political. We’ve already tasted this. I have no doubt there’s more to come.

The government does not want anyone using a professional corporation to pay less tax than the guy working for a salary in the muffler bay of Canadian Tire. This is why income-sprinkling is now illegal, even for husband-wife entrepreneurs. It’s why Bill Morneau made that assault last summer on pizza shop owners, plumbers, anaesthesiologists and every other self-employed person who routinely builds up less-taxed money in their corporation to drain off later as retirement income.

He backed off a little amid a storm of protest, telegraphed what will happen in the future with passive income. That’s the money corporation owners earn on their retained earnings. Starting next year business owners can make up to $50,000 in “adjusted aggregate investment income” which will be taxed at the normal rate. Above that, pay more.

Here’s what Morneau said when he made the change:

“The intent of the new rules will be to target high-income individuals who can benefit under current rules from an unlimited, personal, tax-preferred savings account via their corporation, far beyond the pension, RRSP and TFSA limits available to other Canadians. This is inherently unfair, and the Government is committed to fixing it.”

That’s about as clear as you can get. These guys are not finished. The precedent has been set. Passive income is in the crosshairs. Taxes could exceed 70%. You’ve been warned.

So, why roll the dice? Take a salary sufficient to max RRSP room. Stuff your TFSA, your spouse’s TFSA and those of your adult children. Income-split with a spousal plan and a joint non-registered investment account. Take dividends sufficient to lower your corporate tax profile and be careful not to leave too much in there.

Now, take this blog to your accountant. See what happens.

91 comments ↓

#1 dakkie on 08.10.18 at 5:32 pm

Housing Is Extremely Overpriced And It’s Now Just Starting Its 2nd Major Collapse

http://www.investmentwatchblog.com/housing-is-extremely-overpriced-and-its-now-just-starting-its-2nd-major-collapse/

#2 Stan Brooks on 08.10.18 at 5:48 pm

It is astonishing how the ultra rich liberal elitists are destroying the middle class in the name of ‘fairness’ while voting for corrupted laws that benefit their companies, do not prosecute offshore uber-rich’s accounts but will literally kill financially doctors and IT guys, plumbers, while enjoying their vacations on private french villas and Caribbean islands.

Of course they will never tax homeowners on ‘unfair gains’ bases.

I have never seen such a corrupted group of cheaters, lairs hiding behind liberal ideas.

That’s about as clear as you can get. These guys are not finished. The precedent has been set. Passive income is in the crosshairs. Taxes could exceed 70%. You’ve been warned.

As I said, pack, move you money out and never look back.

Do you want to be screwed by the french villa guy?
Imagine that ugly face coming and getting your RRSP savings/investments with either outright confiscation or higher taxes. That combined with a slap in the face calling you a tax cheater?

Remember , what did these guys do in the offshore tax evasion scandal, bread price fixing, gas fixing, telecom fixing scandals?

That is right, nothing. They are coming after you, not after their friends. And they will get you.

#3 Camille on 08.10.18 at 6:12 pm

Well, thank you for that. I’m still learning, don’t fully comprehend, but will. And no reaching for a study, an expert, or otherwise by the author. Straight sauce. Will reread. Thanks again.

#4 Reynolds531 on 08.10.18 at 6:12 pm

While you’re at it you can say it out loud…there are good advisors/advisers at MD. And the bank. And working out of closed former banks. And there are bad advisors in all those places too. Many of them charging 1 percent. Some more and some less.

Dismissing MD without actually looking at their plan is dishonest and reflects badly on you.

Total disclosure…I’m no longer in the industry. In another life I helped run a large well regarded DC plan.

I made no comment about individual advisors, but rather about firms which flog their own products, rake in very high fees while furnishing inadequate advice. – Garth

#5 Lost...but not leased on 08.10.18 at 6:19 pm

Re alleged Professionals..

Might be a good idea to do some homework re ones profession…and the rackets they are historically involved with.

Lawyers…..were originally BARRED from holding public office..something about conflict of interest…

MDs…..GOOGLE Rockefeller Medicine and FLEXNER report…as a bonus GOOGLE DR. MARYS MONKEY

#6 S.Bby on 08.10.18 at 6:20 pm

Hopefully Trudeau and his clown crew will be out after the next election.

Trudeau: “He’s just not ready”

#7 fishman on 08.10.18 at 6:21 pm

I incorporated 30 years ago to take advantage of Mulroney’s 500 k capital gains tax free gift with a shareholder’s loan. Nice little present, that lasted a year. Next GST; before GST you could cheat like hell because Revenue Canada couldn’t trace your expenses. Days before debit & credit cards, lotsa cash cash.You earned how much? Tough shorting the government nowadays.

Garth’s pretty well nailed it as far as keeping your money & staying out of jail. One thing I’m starting to get heat on lately is CRA is coming down on Retained Earnings. I’d dump any excess cash in R E over what I wanted to pay myself. Nice play to build up a tidy non taxed sum to pick up “deals” for the Co. Now anything in R E over two years & CRA starts grinding my accountant about tax avoidance. Get it out in dividends or payroll & pay your 50% marginal tax rate sucker!

#8 waiting on the westcoast on 08.10.18 at 6:27 pm

And whatever crumbs the government leaves you, the rising interest rates will provide the rest to the banks!

https://betterdwelling.com/the-average-mortgage-and-heloc-payment-is-soaring-in-toronto-and-vancouver/

#9 FOUR FINGERS WATSON on 08.10.18 at 6:40 pm

#2 Stan Brooks on 08.10.18 at 5:48 pm
It is astonishing how the ultra rich liberal elitists are destroying the middle class in the name of ‘fairness’ while voting for corrupted laws that benefit their companies, do not prosecute offshore uber-rich’s accounts but will literally kill financially doctors and IT guys, plumbers, while enjoying their vacations on private french villas and Caribbean islands.

Of course they will never tax homeowners on ‘unfair gains’ bases.

I have never seen such a corrupted group of cheaters, lairs hiding behind liberal ideas.

That’s about as clear as you can get. These guys are not finished. The precedent has been set. Passive income is in the crosshairs. Taxes could exceed 70%. You’ve been warned.

As I said, pack, move you money out and never look back.

Do you want to be screwed by the french villa guy?
Imagine that ugly face coming and getting your RRSP savings/investments with either outright confiscation or higher taxes. That combined with a slap in the face calling you a tax cheater?

Remember , what did these guys do in the offshore tax evasion scandal, bread price fixing, gas fixing, telecom fixing scandals?

That is right, nothing. They are coming after you, not after their friends. And they will get you.
………………………………….

Good points. Little moi thinks that soon they will come for my assets too. I feel vulnerable cuz all my nuts are here in Canada in RRIF, TFSA, market accounts, and cash. And a condo. I can’t move the pension income but I could sure move the other stuff. I am looking around but I have not found a safe haven yet. Where are u stashing your nuts ?

#10 Moose on the loose on 08.10.18 at 6:48 pm

Correct me if I’m wrong, but reasons not to collect salary:

a) if you have already contributed Max CPP for 39 years there is no need to contribute more you’ve hit the contibution ceiling
b) and/or you’ve maximized RRSP contributions along the way for the same number years (probably not worth adding more)

#11 crowdedelevatorfartz on 08.10.18 at 6:52 pm

geez, coulda used this info a few months ago.

#12 dosouth on 08.10.18 at 6:55 pm

Well thank the lord! Boomers are back in the real estate game and all those yungins’ are soon to be delivered to riches within the next 5 years as the oldies down size and sell at losses….

https://globalnews.ca/news/4374001/boomers-millennials-house-prices-canada/

#13 PGer on 08.10.18 at 6:58 pm

They don’t teach accounting in med school, but maybe they should since running a practice is a business. They really seem to spend a lot of time telling med students how special they are though.

(In fact, all Canadians should be taught financial basics in grade school, but then they’d have to hire teachers that aren’t just Arts majors.)

#14 Brian Ripley on 08.10.18 at 7:06 pm

“Housing Is Extremely Overpriced And It’s Now Just Starting Its 2nd Major Collapse” – Dakkie #1

Yes – and in Canada, sales in the big speculation cities of Toronto and Vancouver are crumbling

http://www.chpc.biz/sales-listings.html

From the sales peak in 2016, sales are down 45% in Toronto and down 60% in Vancouver.

Across Canada, MLS sale are back to 2004 levels.

Potential buyers are rejecting asking prices.

#15 Phil on 08.10.18 at 7:07 pm

Garth,

good evening. I do exactly as you mentioned in your post. Reading it from you makes me feel even more comfortable.

Thank you!

Regards,

Phil

#16 Dave on 08.10.18 at 7:07 pm

Large percentage of us dont make it to over 65 years old….all those cpp contributions gone forever if you draw salary.

#17 SoggyShorts on 08.10.18 at 7:09 pm

If I pay myself 100K salary:
29K in tax&CPP

If I pay myself 50K div and leave 50k in corp:
4,500 personal tax
12K corp tax
—-
16.5K tax paid

#18 Mike in Airdrie on 08.10.18 at 7:10 pm

With any luck we can toss this bunch on October 21 2019 and the attack on small businesses will finally end (or at least for 4 years).

#19 SoggyShorts on 08.10.18 at 7:12 pm

option 3:
50k left in corp
50k salary

6K corp tax +2.5k cpp
8k personal +2.5K CPP
19K total paid.

#20 Ex Realtor Mayor vs. Home Flipper for Mayor on 08.10.18 at 7:12 pm

Kelowna sure churns out the brightest on the planet.

Both candidates will for sure bring in policy to pump home prices, their biggest desire, which is good for everybody.

The race to two million dollar homes is on.

Just don’t tell anybody that the market is actually rolling over hard right now.

#21 Tax Nerd on 08.10.18 at 7:18 pm

I am an accountant for specializes in tax planning and would never recommend a structure to my clients when the annual compliance fees would outweigh the tax benefit (or potential tax benefit).

I also would not needlessly complicate my clients’ lives and reporting obligations without a clear taxation win.

I do agree that there is a threshold at which incorporation should occur. If a corporation is consistently making no taxable income then, unless liability is a large concern (but you should be able to insure this away), then a sole proprietorship should be considered.

With CPP if you take the premiums (let’s say $5,000) and invest them yourselves in a diversified portfolio (let’s say 5% return) over your career (let’s say 30 years), you will have a portfolio value of approximately $330k. The benefit of this approach is that you have control over your investments and guarantee that it will be there when you retire (the same can’t be said for CPP for my generation).

The above being said I actually do agree with Garth’s advice to max out RRSP room (and make the contributions to your RRSP). Any corporate income in excess of maxing out the RRSP room should be retained in the corporation for the tax-deferral advantage.

#22 Cristian on 08.10.18 at 7:20 pm

I actually calculated in detail how much would benefit me drawing a salary from the corporation vs dividends.
The answer? Nothing (in the end it was pretty much the same result, or really insignificant difference)
So I went with dividends for simplicity.

#23 Re: Sales Tanking on 08.10.18 at 7:22 pm

Hey Rippley, you should see the price drops happening in Kelowna right now.

Working class homes for broke people around 600K (yeah it is that expensive in this little town) are whacking prices big.

Move into the next class of homes, all six figure price cuts. 300k price cut, no problem.

Buddy across the street just cut his price 70K down to the low 500s. Everything I keep looking at on Realtor keeps re-appearing as re-listed with a lower price.

And go figure, inventory is steadily rising to levels crossing the 6 months of inventory mark. Bring on the buyers market. A buyers market rarely ever happens here. So, this is getting interesting.

Don’t forget, Kelowna is the fastest growing area for HELOCs in all of Canada. Not hard to figure out what is going on there.

#24 Edmonton Showing Stability in Sales on 08.10.18 at 7:24 pm

Go figure. Somewhat affordable there. Calgary an okay option too if you have work there.

#25 Smoking Man on 08.10.18 at 7:36 pm

Or move to the land of the brave, home of the free.
Where if your good, you prosper handsomely. If your useless stay in Canada..

T2 taxes are communism and theft. 40k govt jobs added.
80k private sector jobs lost…

What do Y’all think will happen a few years from now.

#26 Here come the price cuts on 08.10.18 at 7:38 pm

Today, featuring Upper Mission fever (or contagion):

5020 Chute Lake Crescent, Kelowna – Change: – $301,000.00 -21%

448 Okaview Road, Kelowna – Change: – $124,000.00 -10%

1130 Ledgeview Court, Kelowna – Change: – $190,100.00 -14%

760 Cantina Court, Kelowna – Change: – $115,000.00 -8%

1092 Barnes Avenue, Kelowna – Change: – $173,888.00 -13%

#27 Muttley O'Toole on 08.10.18 at 8:09 pm

I have to say that yesterday’s doggie photo has to be the greatest doggy photo or photo-shop of all time as in “please don’t take my nuts”.

#28 will on 08.10.18 at 8:11 pm

Ok got it. Thanx Garth.

#29 FOUR FINGERS WATSON on 08.10.18 at 8:12 pm

#23 Re: Sales Tanking on 08.10.18 at 7:22 pm
Hey Rippley, you should see the price drops happening in Kelowna right now.

Working class homes for broke people around 600K (yeah it is that expensive in this little town) are whacking prices big.

Move into the next class of homes, all six figure price cuts. 300k price cut, no problem.

Buddy across the street just cut his price 70K down to the low 500s. Everything I keep looking at on Realtor keeps re-appearing as re-listed with a lower price.

And go figure, inventory is steadily rising to levels crossing the 6 months of inventory mark. Bring on the buyers market. A buyers market rarely ever happens here. So, this is getting interesting.

Don’t forget, Kelowna is the fastest growing area for HELOCs in all of Canada. Not hard to figure out what is going on there.
……………………………..

Air quality alerts in Kelowna for the last few days…..currently 8 on a scale of 10 depending on where u are. My 5 grandkids are housebound, parents won’t let them out. All under 6 y.o. , one is 6 mo, and one is 11 mo. Looks like F’ing Bejing out there. But hey! The Okanagan lifestyle! The golf courses, the wineries, the Best Place on Earth! Everyone wants to come here !

#30 Sprawl on 08.10.18 at 8:15 pm

Good advice Garth. I was lucky, after using one those huge accounting firms, Big Fees and No Advice, switched to a smaller accountant. I always claimed income to the maximum point CPP dropped off. The rest as dividends. Didn’t do much tricky stuff, having the corporation pay my life insurance (Cash Value to me) and lunch at Harbour 60 Fridays.

Glad I did claim Income, when the auditors came I believe it made a difference.

A fired commissioned sales rep, not paying their taxes, tried to say it was income. Uno the employers responsibility. The CRA kids saw right threw the reps scam. But had this question about co-op students? Six per semester and three over the summer. They where all paid $10 an hour.

My Bookkeeper at the time said no need to take deductions off, as the Yearly Income was under some amount, $2,500 I think. This had gone on for about 6 years.

The CRA kids said, “Not true, that’s old rule, you owe $112,000.00.” lol Just mind numbing. Called a Tax Lawyer, didn’t like what I was hearing nor the retainer.

So I cut a deal with CRA to pay $1,500 a week, $1,000 every Wed and $500 every Friday. After six months and around $39,000 in payments, got a call, CRA wanted to do another audit. I asked seriously? The CRA rep replied the boss wanted to know if I was paying it off as fast as possible.

The audit was short and sweet, maybe three hours. All our business went threw the bank, no cash, easy to track. The Auditor told me they where done and just going to call the office before leaving.

Auditor made the call, said the boss was pleased, hadn’t missed a payment, not going to Harbour 60 for lunch lol. Realized I’d been given poor advice and I was being given Forgiveness on all interest and penalties.!! Debt was paid and have a great day! What a wonderful amazing thing to have happen.

Different times. Heard the Junior Minister of Finance was a dog lover back then.

Got lucky a second time, had a serious health issue in 2011. Of the life changing kind. That life insurance disability and max CPP disability payment came in handy. applied in 2014.

What is disgraceful, CRA is still battling me on the Disability Tax Credit. Just keeps denying it without reason. The relationship between Service Canada and CRA is toxic. After the last DTC letter decline, Service Canada put in an FOI on my behalf. CRA sent it back saying, given the personal nature, I had send in the FOI and not Service Canada. It goes on and on and on.

This is pretty long sorry.

No one close to me ever told me about CPP Disability. When I was using the CRA My Account in 2014 this flag came up “Haven’t received Disability Tax Credit” wth? Got to love those bots. Got to work finding out what DTC and CPP Disability where.

When Service Canada called about my CPP Disability Application, the sweet youngster said they’d check to see if I was eligible. Let out an audible gasp, “OMG you’d paid the most into CPP, for an individual, by 1991”. Not sure want that meant other than made me feel old.

Sent in he CPP Disability Application in 2014, Service Canada was excellent. As this stuff had happened in 2011 asked for 12 months retroactive. Uno at the time I thought, no this is the government, they wouldn’t run out clock and take 12 months to process to wipe out my retroactive benefit due? Correct! CPP took 16 months to process the application! What a disgrace.

What a difference a government can make on the culture of the civil service. CRA is totally politicized. Service Canada is frisky though. Not sure on the dynamic between those two.

This year when I did my taxes with CRA My Account, it asked if I wanted the Tax Program to link with my CRA Account? Absolutely. The program promptly filled in all my income from government sources. When time came to submit the Tax Return, it wouldn’t let me unless I acknowledge I have the Disability Tax Credit. Just crazy.

Our current government has a strange mindset.

Been kind of curious, how the Sears retirees are doing? If Morneau Shepell left any crumbs behind.

#31 Spectacle on 08.10.18 at 8:32 pm

” #11 crowdedelevatorfartz on 08.10.18 at 6:52 pm
geez, coulda used this info a few months ago.”

Knock-knock:: my crowded fumeric friend, how so.

I loved today’s insights, just started running under sole proprietor, ( thank you Garth Turner blog ) I get the write off, and increased my income by 45%. Took a lot of work, and don’t want the criminals running Canada (into the ground) taking food from my baby!
Any thoughts , Dogs?

My industry is comstruction, Not building homes.

#32 Long-Time Lurker on 08.10.18 at 8:36 pm

#89 akashic record on 08.09.18 at 9:10 pm

So does this former The Economist correspondent (among many others).

https://www.youtube.com/watch?v=rUO9hUb3SB8

>What’s notable about that underwater unidentified object is that it has 15, 300 foot projections from it. GIGANTIC!

#33 Ace Goodheart on 08.10.18 at 8:40 pm

Re: 70% tax coming to r.o. in prof corps: there is right now a 65-70% chance that T2 will lose the Oct 2019 election. It is not possible to call yet, but it is creeping towards a conservative win. Either minority or slim majority.

There’s still lots of socialist sentiment left in pockets of this country, but as people gradually realize that socialism involves taking other people’s money and pretending to help the less fortunate while actually paying it to your rich well connected friends, this will change.

I would call better than average chance that we end up with some form of conservative govt in Oct 2019

#34 mike from mtl on 08.10.18 at 8:58 pm

I don’t know.

Being taxed now than, probably in future, with massive odds of more than now seems like a bad deal of a reason to contribute to registered RSP.

So what if you’re able to claim contributions when later you’re taxed as totally inefficient income on your own holdings?

Rather take the known and clear plain non-reg than RRSP and be double dipped in RRSP in withdrawal. .GOV can change the rules for the drones at any moment whereas cap gains are always in ‘their’ favour.

RRSP / LIRA are very inefficient on drawdown is where they get you back, so why give them the advantage now?

Do you know the future more than I?

Personally I don’t believe in deferring taxes now to some magical, unknown future rules later, where I am certain to be taxed again on my own wealth.

#35 Myra Andrews on 08.10.18 at 9:09 pm

I went to a financial seminar several years ago and the advisor said owners should pay themselves a salary at least up to the maximum CPP contribution allowed. Why did she advise that? Because if people take out only dividends they will usually spend all the money and then have no money for retirement. At least if they pay into CPP they have some retirement income.

If you consider the doctor with the 1.8 million house, do you think she would invest the dividend money or spend it? Nuff said.

#36 Chaddywack on 08.10.18 at 9:09 pm

You made a good point Garth. There is so much misinformation about sole prop vs corp. I’ve seen accountants do “free seminars” for med students and residents (usually with free food!)

They never outright have lied, but I’ve noticed at times omissions are made such as not mentioning that you are allowed to deduct the same expenses as a sole prop or quoting the lower corporate tax rate, but not mentioning that you’re taxed again when the money is taken out.

Many many doctors have professional incorporation pushed on them, or think if they don’t incorporate that they will pay significantly more tax than others. I think a session needs to be done on tax integration.

#37 Shawn Allen on 08.10.18 at 9:10 pm

Retained Earnings versus Cash

Fishman at 7 said:

One thing I’m starting to get heat on lately is CRA is coming down on Retained Earnings. I’d dump any excess cash in R E over what I wanted to pay myself.

**************************************
Okay, but hopefully everyone understands that cash is an asset and retained earnings is equity on the other side of the balance sheet that might be invested in corporate assets of any kind.

CRA would be perfectly happy to see retained earnings invested in assets needed to operate the business but the feds are not so happy to see it invested in the stock market which could defer taxes for a long time compared to paying it out as dividends or salary.

#38 Lost in North Van on 08.10.18 at 9:10 pm

Garth

I understand that as an alternative to using RRSPs, a key individual with a corporation who makes decent coin could have the corporation establish an independent pension plan. Any thoughts on that?

As the beneficiary gets older (above 50) an IPP may have advantages over RRSPs in terms of the maximum contribution room plus the corp’s contributions to the plan are deductible.

I understand that there are trade-offs including an inability to use the assets for other than retirement purposes.

Or is this a case where the admin costs to set up and maintain the plan likely outweigh the prospective benefits?

#39 arfmoocat on 08.10.18 at 9:15 pm

#24 Edmonton Showing Stability in Sales on 08.10.18 at 7:24 pm

………………………………………………………………………

What are you talking about?

Active single family home listings: 4729 (4672, 4709, 4718)

Homes 4-week running average: $422k ($436k, $434k, $442k)

#40 Christopher Mewhort, EA on 08.10.18 at 9:27 pm

Three grand! Wow, I am a lot dumber than I thought. I have been charging my Canadian corporate clients $Cdn200-300 a year for their Canadian corporate tax returns. Gosh….

Christopher Mewhort, EA

Fake. – Garth

#41 james gapp on 08.10.18 at 9:29 pm

I lived and paid the surtaxes of the nineties of martin and the liberals 58%in b.c.i prayed for a change you could believe in.wow !!! you cry babies when people that have nothing vote to increase taxes on people that produce and save you get a dose of tax reality we are out numbered .the cage is still spinning but the gerbil has died..quote from a trader circa 2000.

#42 Zapstrap on 08.10.18 at 9:56 pm

#33 Ace Goodheart on 08.10.18 at 8:40 pm
I would call better than average chance that we end up with some form of conservative govt in Oct 2019

Man … I hope you are right. I figure we should all learn from this experience. This is what you may end up with if you are voting a govt. out instead of voting one in. Risky business …

#43 I’m stupid on 08.10.18 at 9:57 pm

If you’d rather read about dogs and what a bunch of scuzzbuckets Re/Max just proved to be, come back on Sunday.

What did Re/Max do?

#44 Binder Dundat on 08.10.18 at 10:06 pm

@#16 Dave

“Large percentage of us dont make it to over 65 years old….all those cpp contributions gone forever if you draw salary.”

Actually, not true. In Canada, 85% of males and 90% of females make it to 65:

https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1310013501

#45 Wrk.dover on 08.10.18 at 10:16 pm

#33 Ace Goodheart on 08.10.18 at 8:40 pm
I would call better than average chance that we end up with some form of conservative govt in Oct 2019

————————

any form of govt. would be an improvement.

#46 Habitt on 08.10.18 at 10:29 pm

For those that think the T2 libs are done have a look at the latest cbcpolltracker. Looks like 100+ liberal seats in the Maritimes and Quebec.

#47 akashic record on 08.10.18 at 10:41 pm

#32 Long-Time Lurker on 08.10.18 at 8:36 pm

What’s notable about that underwater unidentified object is that it has 15, 300 foot projections from it. GIGANTIC!

Similarly to some gigantic archeological structures, with no obvious explanation.

#48 Loonie Doctor on 08.10.18 at 10:42 pm

Thanks for this post Garth. My physician bretheren usually do need the expertise of accountants, but we also need to be educated clients. The best approach for a high income professional really depends on many factors, including their personal spending rate. I have always thought diversification against tax risk with RRSPs and TFSAs rather than incorporation as a monostrategy is wise. The last few years have born that out and it is wistful thinking that this is the end. I honestly have to thank my accountant who got me to think that way a decade ago. Unfortunately, there is a lot of variability in the advice people get.

#49 Al on 08.10.18 at 11:06 pm

I’d like to see the math where taking 499k as income under sole prop is better than inc. Big spender? The RRSP benefit and forgone corp fees are minimal compared to the additional tax you’d have to pay upfront, 43% vs 13%( 215k vs 65k). The only way to lose as a corp is if you give it all back when you withdraw from the corp, but you can pull about 35k/person as dividends almost tax free. It would be hard for the corp to lose its massive 150k yearly lead unless your big spender.

#50 Oft deleted much maligned stock.picker on 08.10.18 at 11:12 pm

A new low for Trudeau. Even the farthest left now lists Trudeau as an incoherrant whacking

https://www.washingtonpost.com/news/global-opinions/wp/2018/08/10/what-canadas-spat-with-saudi-arabia-reveals-about-trudeaus-scatterbrained-foreign-policy/?utm_term=.45f61164006d

In other words …even the idiots have abandoned this clown..

But never fear….he will still be asked to speak alongside Moochelle Obama in the prelude to the left media big push to unseat Trump in the mid terms…..that’s what Trudeau has been paid for……and regardless of the damage he’s done to Canada…word is hishandlers want thier pound of flesh before dumping Canada after squeezing this turds act for thier own purposes.

#51 Joe Schmoe on 08.10.18 at 11:46 pm

Mat leave
HCSA
Level loading income due to peekish earning
Tax deferment

Harper equalized the taxes owed. JT and gang are going after the passive investment.

The former made sense, the later is petty and irrational.

It always made sense to pay yourself a salary to maximize RRSP etc.

What if a dr is saving within their profcorp to do something crazy and start a new practice? Or invest in new equipment?

Totally corrupt in this day and age.

#52 IHCTD9 on 08.10.18 at 11:47 pm

#34 mike from mtl on 08.10.18 at 8:58 pm
I don’t know.

Being taxed now than, probably in future, with massive odds of more than now seems like a bad deal of a reason to contribute to registered RSP.

So what if you’re able to claim contributions when later you’re taxed as totally inefficient income on your own holdings?

Rather take the known and clear plain non-reg than RRSP and be double dipped in RRSP in withdrawal. .GOV can change the rules for the drones at any moment whereas cap gains are always in ‘their’ favour.

RRSP / LIRA are very inefficient on drawdown is where they get you back, so why give them the advantage now?

Do you know the future more than I?

Personally I don’t believe in deferring taxes now to some magical, unknown future rules later, where I am certain to be taxed again on my own wealth
——————

If you invest 1000/month in an RRSP from 25-65 you’ll arrive at retirement with 1.9 million at 6.0%. Of this 1.9 million, only 481,000.00 of your money was ever invested. You got all the income tax you paid on that 481K back, and you didn’t pay a dime in taxes on any of the gains for 4 decades.

Consider the RRSP and TFSA shelters as a gift, and use them while you’ve got them. Paying taxes at your marginal rate on your gains over 40 years will cut your return near in half. Maybe the rules will change, maybe they won’t, but I have a hard time seeing how you’d be better off outside a tax shelter either way.

I rather be stuck scheming ways to get a couple million out of a tax shelter efficiently, as opposed to not having any worries about withdrawing the few hundred grand I managed to squirrel away into a taxable RSP.

#53 Shawn allen on 08.10.18 at 11:53 pm

Actually, taxes used to be higher

James gapp at 41 are you saying income tax rates were higher in nineties than today? No one ever admits that but I am pretty sure it is true.

And corporate taxes were massively higher at about 48 Percent combined federal provincial and that was Alberta. But this is never ever admitted. Instead we get whining to the heavens if the rate is dropped nearly in half but then increased 1 percentage point.

#54 Yorkville Renter on 08.11.18 at 12:05 am

Did salary last year… doing dividends this year.

if things continue, will use excess corp $$$ to fill RRSP with the room I earned but havent used as an employee to bring total tax obligation to $0.

Only possible without CPP or EI payments…

might go back to salary next year… haven’t decided.

#55 FOUR FINGERS WATSON on 08.11.18 at 12:32 am

#46 Habitt on 08.10.18 at 10:29 pm
For those that think the T2 libs are done have a look at the latest cbcpolltracker. Looks like 100+ liberal seats in the Maritimes and Quebec.
…………………………….
Scheer’s Conservatives were the preferred choice of 37 per cent of decided and leaning voters that Ipsos polled at the end of June, while Trudeau’s Liberals had the support of 33 per cent and Singh’s NDP were the pick of 21 per cent.

#56 Russ on 08.11.18 at 12:37 am

FOUR FINGERS WATSON on 08.10.18 at 8:12 pm

Air quality alerts in Kelowna for the last few days…..currently 8 on a scale of 10 depending on where u are. My 5 grandkids are housebound, parents won’t let them out. All under 6 y.o. , one is 6 mo, and one is 11 mo. Looks like F’ing Bejing out there. But hey! The Okanagan lifestyle! The golf courses, the wineries, the Best Place on Earth! Everyone wants to come here !
———————————–

Damn straight!

Don’t you wish wish it was like winter again in Ontario?

-30 C and it’s great indoors.

We all miss the old days but I’d rather complain about the heat than complain about the cold.

Cheers again.

#57 Spock on 08.11.18 at 12:51 am

@ #17 SoggyShorts on 08.10.18 at 7:09 pm

You will pay when you take out the other $50K from the company. Either way the piper has to be paid.

I used to take dividends but have switched to a full salary. With the new rules in place on passive income inside the corporation it makes no sense to keep too much money inside corporation if you are able to salary it out.

Also easier to explain the salary to spouse for doing work than explaining the dividend.

>>>

#17 SoggyShorts on 08.10.18 at 7:09 pm
If I pay myself 100K salary:
29K in tax&CPP

If I pay myself 50K div and leave 50k in corp:
4,500 personal tax
12K corp tax
—-
16.5K tax paid

#58 Vision on 08.11.18 at 12:51 am

Housing Is Extremely Overpriced And It’s Now Just Starting Its 2nd Major Collapse
——————
The “ sheeple “ still do not believe this. They will keep on buying and accumulating debt.
Whoever I speak to , still believe that houses are going up … these types determine the market.

#59 Vanpire studies on 08.11.18 at 1:10 am

17/19 shorts – those two options leave money in the corp. When you pull it out you get hit. It evens out as Garth says. It’s designed that way.

21 Tax nerd. CPP will still be there for you BUT as per your example will it give you a decent return?

Try your 5% return on 10% of a 50k income (comparable to self-employed CPP contribution) for 35
year working life. Then assume you still earn 5% but take payments to run out in 25 years.

Ignoring inflation, you can pull at a rate of about 2/3 your income. CPP isn’t going to pay anywhere close to that.

#60 Newcomer on 08.11.18 at 1:24 am

I pay 1K for my corporate filings, including T4s for my wife and I, GST and CPP and dividends when I take them. I have a bookkeeper, so the accountant doesn’t have much work to do, but 3K for a corporation with one employee and less than 1M in revenue would be a burn.

#61 Man buns on 08.11.18 at 1:26 am

$500k!!! Have you lost your mind?!? Have you ever heard of tax deferral? I’m assuming no based on this blog post.

#62 Smoking Man on 08.11.18 at 1:46 am

Capitalusm
When you are at Italian bakery. And there is mire bread than buyers.

Communism
Your at a bread place and there are more people than bread..

#63 Oft deleted much maligned stock picker on 08.11.18 at 2:38 am

Trudeaus energy plan is to enrich KSA and impoverish Canada…..and apparently the Tides Foundation protest groups funded by George Soros agree. Saudi tankers ok….Canadian piped ethical oil….not.

https://www.facebook.com/590117937780756/posts/1665127116946494/

#64 Buy? Curious? on 08.11.18 at 3:02 am

Listen up, Maple Swilling Canadians! Saudi A-Nerdia is trying to push us around! Are we going to take it? Do you think accountants are going to help us? Thank gawd we have Justin Tru-Bro who knows how to box.

#65 Allan Fefergrad on 08.11.18 at 7:32 am

Good points. They place I disagree is with the CPP. Quebec has already raised contribution rates in preparation for a predicted shortfall in the future. 10.8% if you’re self-employed.

Pay out dividends, avoid the mandatory contribution to CPP/QPP, save on your own and control your own destiny.

How do we know that any money will be left for us young folks to collect in 30-40 years?

Ponzi scheme?

#66 SimplyPut7 on 08.11.18 at 8:44 am

Here’s what Morneau said when he made the change:

“The intent of the new rules will be to target high-income individuals who can benefit under current rules from an unlimited, personal, tax-preferred savings account via their corporation, far beyond the pension, RRSP and TFSA limits available to other Canadians. This is inherently unfair, and the Government is committed to fixing it.”

That’s about as clear as you can get. These guys are not finished. The precedent has been set. Passive income is in the crosshairs. Taxes could exceed 70%. You’ve been warned.

——————–

Don’t you have to be in power to continue to implement such a plan? No province east of Quebec has a Liberal leader as their Premier.

October 2019 is not that far away.

#67 Ponzius Pilatus on 08.11.18 at 8:48 am

#62 Smoking Man on 08.11.18 at 1:46 am
Capitalusm
When you are at Italian bakery. And there is mire bread than buyers.

Communism
Your at a bread place and there are more people than bread..
————-
Socialism
Enough bread for everyone.
And Non GMO, to boot.

#68 KLNR on 08.11.18 at 9:08 am

@#46 Habitt on 08.10.18 at 10:29 pm
For those that think the T2 libs are done have a look at the latest cbcpolltracker. Looks like 100+ liberal seats in the Maritimes and Quebec.
___________________
wishful thinking on there part. Conservatives only get into power with voters as a last resort. ie: doug ford in ontario. probably a few more terms for the libs before the get ousted.

#69 Ace Goodheart on 08.11.18 at 9:42 am

Re #42 Zapstrap:

Federal elections are harder to call than Provincial, but the way I see it, T2 is going to lose Ontario by fighting with Fordsie over carbon taxation. He’ll also lose Saskatchewan doing the same thing. Alberta just turned Tory after flirting with socialism and as for BC, well they’re like California: moody, self centered and hard to figure out. They may stay socialist for a while. They may play with socialism and try to make it into a thing. That’s BC.

Quebec hates anything English and will vote for the French guy. Eastern Canada usually apes Quebec.

No idea what Manitoba or the Territories will do. They have so few seats it probably doesn’t matter.

Oh and we also have Trump who, love him or hate him, is a massively strong influence to Ontario, Manitoba, Saskatchewan and Alberta voters because if you piss him off, he will destroy your local industries and those Provinces rely heavily on trade with the USA. T2 pissed Trump off.

So there you are. Probably a conservative minority or a small majority.

#70 crowdedelevatorfartz on 08.11.18 at 10:04 am

@#43 Im Stupid

“What did Re/Max do?”
+++++
You come by your name honestly…as do I.
What havent the Real estate cartels done?
But
You’ll have to wait til Sunday to find out.

#71 X on 08.11.18 at 10:08 am

Has Wild Bill clarified yet as the teh $50,000 in passive income? Passive to me is dividends, interest and such. I am assuming Capital gains will be considered the same as passive for the purposes of taxing those individuals.

#72 Doctor James on 08.11.18 at 10:16 am

It’s really sad that our professionals had to be so far in student debt! I read a good article yesterday that you should get a lower education and have less debt to start life. Well I hope she’s okay, we are hoping for the best for you! We need good doctors in Canada!

#73 Selling condo buying house on 08.11.18 at 10:28 am

So I have ignored Mr.Ts advice for the past five years, bought and sold one house and bought one condo.
However writing is on the wall, and I am selling my condo in Vancouver. Gosh I paid $412,000 two years ago now listing at $690,000. Condos are still hot. Last one like mine sold in one day same price last month. Wish me luck.
CBC now says the boomers are leaving the big cities like Toronto and Vancouver and moving to small towns.
So as a boomer my wife wants a house in Comox! OMG!
Anyway, been looking yesterday four properties dropped prices by 10 percent. Let’s hope I can sell high and buy lower!
So with a defined Pension, $220000 in TFSA, all stocks, $100,000 in RRSPs all ETFs, $100,000 cash, I know not good, but I have my reasons, and house net worth if it sells $450,000
Wish me luck.

#74 IHCTD9 on 08.11.18 at 10:29 am

#67 Ponzius Pilatus on 08.11.18 at 8:48 am
#62 Smoking Man on 08.11.18 at 1:46 am
Capitalusm
When you are at Italian bakery. And there is mire bread than buyers.

Communism
Your at a bread place and there are more people than bread..
————-
Socialism
Enough bread for everyone.
And Non GMO, to boot
————

Then there’s IHCTD9ism, make the bread at home to side stem the taxes of socialism, the scarcity of Communism, and the bread imported from China made with recycled tires of Capitalism.

#75 Pumpkin on 08.11.18 at 10:45 am

From what I understand it, the biggest potential benefit of incorporation over sole proprietorship is tax deferral. I understand the argument that if you wait 30 years until retirement, the rules might have changed by increasingly socialist governments and it would be risky to hang your hat on that. But tax deferral is helpful for short term fluctuations in income too (for female physicians, maternity leave would be a really big one).

#76 Horizons etfs on 08.11.18 at 11:20 am

For the DIYs out There , horizons just put out another great product for taxable accounts

Hbal -no distributions . Rebalance for us

#77 Long-Time Lurker on 08.11.18 at 12:17 pm

Any thoughts on the Turkey situation? I’m reading that they may need an IMF bailout and that EU banks have Turkish loan exposure. So is a Turkish crash going to cause a global economic shock like the US did in 2008? A bit of a stock market dip coming up?

By the way, Trump tweeted that he’s going to tax cars if he can’t get a deal with Canada.

#78 Geoffrey on 08.11.18 at 12:19 pm

I agree in totality with this article and I am an Accountant by trade, the difficulty is convincing some client’s that an appropriate mix of dividends and salary is the way to go, more so, in owner managed enterprises.

#79 MonsterBox on 08.11.18 at 12:24 pm

#67 Ponzius Pilatus on 08.11.18 at 8:48 am

#62 Smoking Man on 08.11.18 at 1:46 am
Capitalusm
When you are at Italian bakery. And there is mire bread than buyers.

Communism
Your at a bread place and there are more people than bread..
————-
Socialism
Enough bread for everyone.
And Non GMO, to boot.
————————–

Haha… yep Venezuela’s got lots of bread (non-GMO) and only 43,000% higher than yesterday.

#80 B Wilds on 08.11.18 at 1:52 pm

Oh how people love their tax saving games but more important is where they stash their wealth when all is said and done! Paper wealth can be very fleeting.

It could be said that “paper wealth” is merely a promise of future value. Unfortunately, this leaves much of society and many rich individuals vulnerable to rapid financial loss if the tides of fortune shift or if values rapidly change.

People tend to avoid tangible assets in their control because they are often inconvenient. Valuables can be a pain to have about and they often need to be insured which also calls attention to their existence. More on the danger created by holding your wealth in “paper” in the article below.

http://brucewilds.blogspot.com/2017/02/where-wealth-is-stored.html

#81 Ace Goodheart on 08.11.18 at 2:20 pm

Wild Bill, one of the wealthiest men in Canada, heir to the Morneau family fortune and also quite a bit of the McCain fortune through his wife, decides that it is “unfair” that well educated doctors, lawyers, and other professionals, who gave up years of their lives, went into student debt in the hundreds of thousands of dollars and work in some of the most difficult and demanding careers on the planet, be able to amass net worth.

These people should be taxed back into poverty, says Bill. It is not fair that they have more than their neighbours who work in factories or blue collar jobs.

Everyone should be equal….except of course the Morneaus and the McCains….

#82 Albertaguy in AB on 08.11.18 at 2:22 pm

As Garth alluded to, I am one of those IT guys that was required to have a corporation to meet contracting requirements.

The question i now have is this: How to most tax effectively withdraw retained earnings from corp once retired and no longer actively earning income?

#83 Left Over on 08.11.18 at 4:46 pm

In basically the same camp as SoggySocks, accountant charge $1,000 for the return and I do my own reporting online for $50 a year. Apart from a lower tax bill I like the discipline of having assets in a Corp and it would be a pain to convert all my accounts back to a proprietorship as all my Clint’s pay via EFT. Also I did a lot of work getting set up with the IRS as a Corp since we do a lot of USA business.

#84 After Communism on 08.11.18 at 6:52 pm

@82
How to most tax effectively withdraw retained earnings from corp once retired and no longer actively earning income?

Be sure to pay at least $1178 out of your corporation as an expense fee/salary to you to show something on line 101 or 104 on your personal tax return because line 363 lets you deduct that amount. That is a start.

#85 incorporated on 08.11.18 at 9:15 pm

Conservatives will take back control sooner or later, and the 70% tax will be gone.

#86 its not one or the other on 08.11.18 at 10:09 pm

Garth,
Your analysis is too black and white.

Many who incorporate use it for a BLEND of approaches.
They can take salary, up to their target marginal tax bracket (lets say, between 90K and 140K) and leave the rest in the corporate to grow tax deferred. Then, dividends can be used for additional big ticket items, like a new car, new roof, kids wedding, etc.

And corporations let you level your salary each year, should you decide to take a year off for example, especially for lady doc who is on maternity leave. Spreads her 270K income over 2 years, for example. (vs 270K one year, 0K next year).

I don’t know any incorporated person who pays 100% dividends. So throw out your arguments about CPP and RRSP, because those are already accounted for.

#87 Adios on 08.12.18 at 9:28 am

Happiness is ticking the non resident box
upon entering Canada.

#88 Snowtires on 08.12.18 at 1:54 pm

Update from the Smokienagan…

Well the final figures are in from our US home sale – from the initial investment of $ 160K CAD, our net (after taxes, fees, commissions) is $ 90K CAD.

Not bad for almost seven years of winter vacations in the sun and sand.

When we look at our overall situation for real estate since 2001, we’ve averaged a net return of 7% per year on our sales.

Just sold the Kelowna condo we bought in 2015 – our net averaged a 9% increase per year.

So although we still use the esteemed professors’ investment wisdom on our remaining investments, real estate has out-performed them consistently.

We move into our new place in a couple of weeks, horrors of horror, granite and stainless everywhere – but we can now get a dog!

We expect this will be our last abode before we start pushing up daisies, so we decided it would have to be the best!

From the traveller formerly known as the Snowboid.

#89 Tater on 08.13.18 at 7:59 am

44 Binder Dundat on 08.10.18 at 10:06 pm
@#16 Dave

“Large percentage of us dont make it to over 65 years old….all those cpp contributions gone forever if you draw salary.”

Actually, not true. In Canada, 85% of males and 90% of females make it to 65:

https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1310013501
—————————————————————–
And if you’re in your 30’s or 40’s (generally when people are making these sorts of decisions) you’re odds of getting to 65 are even better.

#90 Jon on 08.13.18 at 4:08 pm

Great advice. Thank you. I’ve been operating my biz as a corporation for several years and I fear it’s only cost me accounting fees. I set up the corp. to save retained earnings for the future. Now that I can no longer do that, there’s no upside to being incorporated.
I’m switching to a sole proprietorship ASAP. I should have done this long ago.

#91 Shawn Desman on 08.13.18 at 5:07 pm

T2 and Morneau are finished anyways. I’d like to see them win a election having lost Ontario. They and their communist policies are done.