As many of my readers know already, I started a web company a few months ago. After going throughout the whole process, I can say that Canada is probably one of the best countries to have a start-up. It is definitely not perfect (it is a small market for several products and services for example), but it gives us one of the biggest advantages we could be looking for: we are living in a country with a high tax bracket.
Why a high tax bracket is a good thing?
The answer to this question is very simple: if my marginal tax rate is at 42%, it is incredibly tempting to start a company where its tax rate will be 21%. So I am cutting down my tax rate for my alternative source of income by half!
However, there is another problem. The money earned belongs to the incorporation, not the individual. If I want to access this money, the company must pay me through a salary (42% tax rate), dividend (33%) or bonus (again, 42% tax rate). So technically, there are no advantages to start a company since you are paying 21% first, and than another 33% at best. So on $1,000, you get $529 in your pocket after paying taxes for the company and your personal taxes. This is what we call double taxation (or getting pretty much fooled 😉 ).
There is another way
The government is not always sucking up the blood of our wallet till death. He can give us some ways to pay fewer taxes. For example, my company can pay me a rent of $300 a month for example. That $3,600 yearly expense will be fully tax deductible in the hand of my company. However, it will be fully taxable in my hand. However, I am allowed to deduct a part of my expenses (interest charges, municipal and school taxes, maintenance cost, renovation (for the office)) as well. Than, if my office takes 20% of my property (about half of your basement for example), you are able to deduct 20% of all your expenses. Therefore, it would result into a net rental income of about $300 a year 😉
This is only one example of how you can legally apply tax rules to your personal situation in order to benefit from the fact of having a company. I must insist on the point that everything that is being deducted from your company income must remain within the tax laws. I have seen too many people going crazy about expenses and never paying any taxes… until the government knocks on their door one day to claim their due.
This is why it is so important to leave this kind of calculation to an accountant or a tax expert. It may cost a few hundred dollars or even a couple of thousand bucks, but operating legally is definitely more important!
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