Does it make sense to incorporate as an employee and take advanatage of the benefits of a business?
I have been offered job and I understand that tax could be reduced if I establish a corporation with myself and my wife as shareholders. What type of tax savings could I realize if I were to incorporate?
Businesses have a wider range of income deductions available to them over the employee and the small business deduction makes incorporation an attractive option for a profitable company. Why not establish an corporation, hire yourself and the sign an agreement with your former employer to provide the same work?
First of all, being a corporation and providing the same services relieves your employer from providing benefits. Your employer will no longer needs to provide you with medical and dental benefits or other benefits and you will be responsible for sourcing and providing these benefits yourself. Your company will also be subject to its own liability and your former employer may not need to protect you from any lawsuits that may result from your actions.
On the tax side however, there are, in my opinion, no benefits. The Income Tax Act deems these sorts of corporations as personal services corporations. Personal services corporations are thus denied all expenses except those that would normally be allowed to an employee. In addition, the small business deduction is not extended to the personal services corporation.
Given the way in which integration between corporate and personal income taxes works in Canada, a person working in Alberta and earning $160,000 would have an average tax rate of 31.23% (in 2008). A personal services corporation earning $160,000 of income and flow that income out to its shareholders would result in an average tax rate of 44.7% to the shareholder. Thus, unless a corporation is an active business, there is little benefit to incorporation and may result in higher tax.