I frequently receive e-mails through my contact form on a variety of topics and I endeavour to answer most reader e-mail as soon as possible.
From time-to-time though, I get some interesting questions that would benefit a wider audience and will address the issues here as well as a direct to you. Note that I do not publish personal information and treat all questions with strict confidentiality and any identifying marks in any e-mail are removed.
A reader who is a new resident of Canada has some interesting questions in a recent e-mail:
Is there an amount of income in Canadian tax law that I can earn that will not incur any tax? For example, in Singapore, when I earn less than $20,000 I do not have to pay any tax.
Secondly, if I own only shares in a private limited company is the earning of that company treated as my income?
Tax Free Earnings
The short answer to the first part of the question is yes. The basic exempt income for an individual resident of Canada is at the very least $9,600 (in 2007).
The Canadian tax system has a system of tax credits that reduce or eliminate taxes for residents of Canada based on a number of factors such as your age, whether you are married, have eligible dependents, as well as other criteria. Non-residents, businesses, estates and trusts are not provided these basic tax credits.
Federally, the basic personal amount for 2007 was $9,600 which provides a basic tax credit of $1,440 (15% of the basic personal amount). Any income below these key amounts will not result in the tax payer paying any income tax for the year and income over these key amounts is subject to tax.
If you are the owner of shares in a limited liability company, the income earned by that company are taxed in the hands of business and are subject to the corporate income tax rates. Any dividends received by an individual are taxed in the hands of the individual and any capital gains and losses from the disposition of shares of that company are attributed to the owner of the shares.
If the company is a resident Canadian corporation (public or private), the dividends are subject to preferential tax treatment. If the dividends are from a foreign corporation, the dividends are treated as straight income.
If the company is a Canadian controlled private corporation (a CCPC) the company may be eligible for a small business deduction. The small business deduction can reduce the taxes payable for small corporations.
Finally, there is a lifetime capital gains exemption of $750,000 (after March 2007 and $500,000 before March 2007). The LCGE exempts an individual from capital gains realized from the disposition of qualified farm property or qualified small business shares.