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Incorporating
Last week I've got a contract position through the recruiting agency. They required me to be incorporated. So I promptly became incorporated, got business account and so on. Now I'm starting to research how it's all supposed to work. I imagine I'll need to work with an accountant to get the best advise on taxes and other things I need to do. But I have a question for those of you who are incorporated, how do you pay yourself? Did you make yourself an employee of your company? Do you pay yourself dividends? I'm in Canada, so how about EI and CPP? Thanks for your advise.
Just incorporated
Monday, February 23, 2004
Why not just find a CPA (accountant in public practice) and use him as a sounding board? I incorporated three years ago in the US. The technicalities - *all* the filings, forms, taxes, fees - are rather daunting.
Besides, if the complexity of the administrative crap that you have to deal with in running your corporation is anything like it is in the US, you will definitely need an experienced tax and planning professional.
In my own case, I pay myself about 1/2 my billings as salary, and I use Quickbooks Pro to calculate all withholdings and to generate the various tax payments.
Find someone who specializes in working with small business. They're out there. This type of accountant is truly the "origin" of outsourcing, IE, the rented expert who isn't on your payroll.
Bored Bystander
Monday, February 23, 2004
> Did you make yourself an employee of your company? Do you pay yourself dividends?
I believe one object of the exercise is to minimize tax. You might pay yourself some income (because a little income has a low tax rate), and some dividends (because dividends from a Canadian company are taxed in a special low way).
Plus, you can "leave money in the company" (so that for many years the cash is owned by your company, and not by you) in which case the company pays tax on it but you don't (and corporate taxes are lower than personal taxes), so that it behaves something like an RSP (i.e. you defer having the money and paying the tax on it until some year in the future).
Furthermore you can get your company to buy and own some things (especially depreciating things) instead of you, such as a car.
> I imagine I'll need to work with an accountant to get the best advise on taxes and other things I need to do.
Yes: that's what my lawyer told me.
> I'm in Canada, so how about EI and CPP?
And GST.
Christopher Wells
Monday, February 23, 2004
Thanks guys,
to pay yourself any type of income, do you have to be an employee of the company? By default I'm the director, is it enough to pay myself? Do I have to get a payroll account then? I'm sure I'll figure it out eventually and I'm definitely going to work with an accountant, but it really helps to see how it's done from "real" experience.
Just incorporated
Monday, February 23, 2004
Is your contract in Canada? It this is the case than you can probably pay yourself like a director. I did this in the begining. Eventually if you make good money the CCRA will ask you to pay yourself every month and submit source deductions - so you will have to become an employee. If you get contract in the US everything becomes quite complex. In both cases your company should not make any money - basically you have to draw enough money and pay personal tax. So - no you can't get dividends. You have to find good accountant and this may not be very easy. I have had 3 accountants in the past and am using the services of #4. When looking for accountant be very carefull when somebody tells you "Don't worry - We will set you up with everything". When I hear this phrase I start to look for the exists. Don't take the accountant that the agency you are working through suggested without checking a few other guys first. I hope you got a few extra bucks on top of your rate since you aggreed to become independent. There is an overhead in time and money that you should be compensated for.
Canadian Contractor
Monday, February 23, 2004
Yes, I believe you do need to be an employee as well as a director.
(BTW, it sounds like it's too late in any event, but I hope you picked a business name that didn't have your name in it. My dad incorporated as "his name, inc." and reports experiencing much greater skepticism when applying for loans, lines of credit, etc. Even though he's legally a corporation, same as, for example, Enron, it gives the appearance that he's self-employed.)
Sam Livingston-Gray
Monday, February 23, 2004
My contract is in Canada and I'm not planning on working in the states.
> I hope you picked a business name that didn't have your name in it.
It'a numbered corporation. Since I'm working on contract and don't need to advertise my company to customers, the name is not important. I can get a trade name later.
>Yes, I believe you do need to be an employee as well as a director.
How do you do that? Do you need to set up a payroll account?
Just incorporated
Monday, February 23, 2004
[quote]
Plus, you can "leave money in the company" (so that for many years the cash is owned by your company, and not by you) in which case the company pays tax on it but you don't (and corporate taxes are lower than personal taxes), so that it behaves something like an RSP (i.e. you defer having the money and paying the tax on it until some year in the future).
Furthermore you can get your company to buy and own some things (especially depreciating things) instead of you, such as a car.
[/quote]
I don't think this is a good idea. One of the reasons of having corporation is to limit you liablility. Keeping the money in the company defeats that purpose.
Also buy your car with your own money and let the company pay yourself for every kilometer that you drive to do business. I believe the CCRA is not going let your company buy you a car since you are not going to use it only for business.
Another poster suggested something very important - keep all your and company finances completely separately. Get a debit card or credit card for your company account and use it when you buy things for your business - software, hardware, chair for the office and so on... Don't buy it with your own money. It makes things more complex for no good reason.
When you choose an accountant - make sure he speaks in language that you understand. Don't go for any complex schemas.
Canadian Contractor
Monday, February 23, 2004
I don't know how things are in Canada but in US you can find a payroll company or banks that will handle all of the details of the payroll processing for a small fee. You just need to tell them how much you want to be paid each month and they do the rest including tax calculations and quarterly filings. You definitely need an accountant on hand to handle year end filings though.
Eil
Monday, February 23, 2004
I'm going to give non-standard advice and tell you to stay away from the accountants. And the incorporation lawyers. Our experience was that they just cost money.
We found it more effective to read all of CCRA's material (very well done btw) and then call and ask lots of questions. They are there to help you, and if you ask for help but still screw something up, CCRA is pretty good about waiving fees, telling you what you did wrong and / or reversing fees and penalties if it comes to that.
They also have a ton of seminars, many are free (http://www.ccra-adrc.gc.ca/events/menu-e.html). And your local entrepreneurship center can help you out a great deal too. In Ottawa you can find out more at http://www.entrepreneurship.com/. Much of the info on this site is generally applicable.
Re: GST. All you need to know is here: http://www.ccra-adrc.gc.ca/tax/business/topics/gsthst/menu-e.html When we incorporated (are you federal or provincial btw?), CCRA sent us stuff in the mail about the various accounts and we just filled it out. But the link on this page labelled Registration gives you all the info you need.
Re: PST. You may or may not need to collect PST. You should find out - PST auditors in Ontario have no sense of humour. If you were supposed to collect it and didn't, not only is it difficult to get it from your clients, but the penalties are not to be laughed at. And if you do get a PST account, there is a big advantage to not submit it late...
Re: EI. If you own 50%+ of your shares, you can ignore it. You aren't allowed to claim it anyway, so you don't have to deduct it.
Re Employee versus not employee. Read http://www.ccra-adrc.gc.ca/E/pub/tg/rc4110/rc4110ed.html and http://www.ccra-adrc.gc.ca/tax/business/topics/payroll/menu-e.html. If you are an employee, it is *much* easier to claim SR&ED tax credits. If you don't do any research or innovation, then this doesn't apply. As an employee, you must deduct CPP and taxes from your pay cheque. If your monthly remittance is less than $1,000, you can be a quarterly remitter (as long as you remit on time). If you are the only employee, you are likely to qualify.
Further reading: http://www.ccra-adrc.gc.ca/tax/business/topics/life-events/menu-e.html
Tax information and other related government sites for topics on Business life events, such as:
-starting a business
-changes to your business
-closing CRA business accounts
Lots of good stuff there.
Hope this helps...
Phibian
Monday, February 23, 2004
Thank Phibian, I'll make sure I look thorough those links.
Just incorporated
Monday, February 23, 2004
Congratulations! No longer a corporate drone.
As someone who escaped cubical hell three years ago, I hope that you enjoy your new company as much as I have enjoyed mine.
I will offer a few tips I have learned along the way and I can clear up some of the misinformation provided above:
1. Pay yourself as an employee. This is good idea for a few reasons:
* You can manage your personal finances as you always have
* Your bookkeeping is much easier
* Doing payroll is a breeze
* No tempatation to haphazardly withdraw money from your company
2. Dividends
If I decide to withdrawl additional funds from my company, I always do it as a dividend. A few notes about this:
* The CCRA have a bunch of beancounters who are very good at ensuring that no matter how you pull money out of your company, you always are in about the same tax bracket as if you had been an employee. I have analyzed this ten ways from Sunday, and the tax you pay is almost always the same. Thus you will not save a great deal of money doing this, nor will you lose any.
* You will have to submit a T5, which your accountant will prepare for you at your company's year end
3. EI
You aren't eligible for it so you don't pay. You can't collect it either. Phibian alluded to the particulars of this above.
4. CPP
You pay this twice! You owe the CPP portion you remit as an employee (although your employer has always done this for you in the past). Plus you remit a second installment contributed by the corporation. See #10 below for how to calculate this.
5. Bookkeeper/Accountant
It has really been worth it to me to have a good bookkeeper and accountant. I figure that by having them do this work, I have a net gain of $8000/year by billing that time instead of doing the books. Something to consider.
6. Keeping money in the business
Here's where things get interesting.
* Personal income tax is tiered. The more you make, the more you pay.
* Corporate income tax is static at roughly 19%. If you leave the cash in your business and invest it, over a long period of time, you will save big time.
* If you are sure to take out dividends to top up your RRSP's, you could have a very favorable tax situation.
Obviously, your personal financial plans are different than mine, but that's why a good accountant is important.
7. GST
You will collect this and remit it quarterly in all likelihood. You will remit the amount you collect - the amount you paid out in expenses. Having your books up to date is important so you don't over pay or under pay.
8. Company Vehicle
You can purchase assets through the company, such as a car.
* Keep a mileage log for work related trips
* You (or your accountant) will calculate a % based on the total number of kilometers driven for work as a function of the total kilometers for the year. Mine is about 85%.
* This number is used to calculate what portion the company can write off as depreciation. If your car depreciates by $10000 then you can write of $8500 of it.
* The rest is claimed on your personal income tax statement. Thus, the other $1500 is accounted for there.
9. Company Bank Account
Get one.
10. Payroll
The CCRA provides software each year with the tax tables in them. Just plug your numbers in an you are good to go.
http://www.ccra-adrc.gc.ca/tax/business/tod/
It will calculate Federal Tax, Provincial Tax, CPP and EI (but not for you!).
11. Online banking
My bank allows me to remit GST and Income Tax online. This is a great time saver, so be sure to inquire about it.
Feel free to contact me if you have questions.
Canuck
Monday, February 23, 2004
Ohh .. I didn't mean to imply that Phibian gave you incorrect advice ... quite the opposite actually.
Canuck
Monday, February 23, 2004
> If you are sure to take out dividends to top up your
> RRSP's, you could have a very favorable tax situation.
Could you explain a bit more here?
My understanding is that dividends do not generate RRSP contribution room. So make sure you pay yourself enough 'earned' income (T4'able) to create the maximum RRSP allowance for the year.
Is this correct?
I don't think anyone has mentioned the income splitting possibilities with a corporation. I believe there was a tax case back in the 90's that OK'd having a spouse as a shareholder and paying them dividends. If you are a single income household this can be a huge saving. But check with an accountant first :)
Rob Walker
Monday, February 23, 2004
Can all of us Canucks please agree not to mention RRSP's for a few weeks?
Please, and thank you ;-)
Nigel
Tuesday, February 24, 2004
<snip>
Could you explain a bit more here?
</snip>
I didn't really explain that very well ... argh! Sorry.
Firstly, some people take out RRPS loans to top up their contributions. By taking a dividend from your company instead, you save the interest on a loan.
Secondly, you you can record an expense against the corporation thus lowering taxable earnings. Since the corporate rate is about 19%, a $5000 dividend will result in a tax savings of $1000 for the company. Since I own the corporation, it might was well be going in my pocket.
Thirdly, if you dump the dividend amount directly into your RRSP, it doesn't get taxed. The contribution amount usually negates the income tax you would have had to pay otherwise. No income tax!
So, the savings really comes in two ways:
1. Saving interest on a loan
2. Saving 20% on the corporation side.
This situation really only applies is you haven't contributed the full amount to your RRSP during the year.
<snip>
My understanding is that dividends do not generate RRSP contribution room. So make sure you pay yourself enough 'earned' income (T4'able) to create the maximum RRSP allowance for the year.
</snip>
This is a great observation. It is something to be considered *IF* dividends aren't counted towards RRSP contribution room. It would be a very valid concern for many people.
For myself, my investment strategy doesn't hinge on maximum RRSP contributions for the next 5-8 years, so I haven't had to address this problem. Yet. You can be sure my accountant is getting a call this week though!
Canuck
Tuesday, February 24, 2004
[/quote]
* Corporate income tax is static at roughly 19%. If you leave the cash in your business and invest it, over a long period of time, you will save big time.
[quote]
Of course you will have to pay tax again when you withdraw the money (presumably at lower tax rate). And you have to pay tax if you invested the money and earned interest. I am also wondering if the government could reclasify the business as an investment business instead of software consuliting business. If you have good accountant you may come ahead. However in my case the #2 accountant firm that was suggesting this approach turned out to be bunch of complete bozos and I am happy that didn't go for this complicated way of doing things.
[quote]
I don't think anyone has mentioned the income splitting possibilities with a corporation. I believe there was a tax case back in the 90's that OK'd having a spouse as a shareholder and paying them dividends.
[/quote]
Good point. My corporation pays salary to my wife. Some accountants will tell you that you can split the income any way you want.
(50/50 of course being the most benefitial). Others will telll you that you have to split the income based on the amount of work employees are actually doing. I am using the more conservative method.
My view is that it's better to concentrate my mind on my consulting career than spend time looking for oportunities to save few bucks on taxes (by claiming my haircut as a business expense for example)
I think all the people that posted on this thread made some very good points. I think researching the CCRA web site is an excellent idea. It will take some time but it will be worth it. The more educated you are in this area - the better you can judge if an accountant is giving you a good advice.
It's true that CCRA agents that deal with small businesses are much nicer than the ones that deal with the general public.
And one more thing - if you are hiring an accountant - especially one of the 'creative ones' that claims they will save you a lot of money - make sure they will handle a possible audit.
There a lot of advantages of having your own company.
Good Luck
Canadian Contractor
Tuesday, February 24, 2004
[quote]
So, the savings really comes in two ways:
1. Saving interest on a loan
2. Saving 20% on the corporation side.
[/quote]
Well - I already took the money as salary so I don't have to take a loan. Since I have higher salary I have higher RRSP contribution ceiling.
The company didn't make money - so it doesn't have to pay 20% tax.
On the negative side I already paid income tax.
So it looks like this things cancel each other out.
And again - I am not an expert - a good accountant may be able to save you a few bucks this way. One more thing to consider - if you decide to do some work in the US through your profitable corporation - you will pay more taxes.
(Or so I was told by one CA and one CPA)
Canadian Contractor
Tuesday, February 24, 2004
<snip>
If you have good accountant you may come ahead. However in my case the #2 accountant firm that was suggesting this approach turned out to be bunch of complete bozos and I am happy that didn't go for this complicated way of doing things.
</snip>
My father has been a CA for almost 40 years and his council has been invaluable. I don't know how I would have done it without his help. He certainly preached conservatism and avoided the 'grey' areas of accounting (there are a lot of them!). But he knows the system well and was willing to teach me some of the finer points.
He has since retired and as they say, good help is hard to find.
Canuck
Tuesday, February 24, 2004
Canadian Contractor,
As I stated:
"This situation really only applies is you haven't contributed the full amount to your RRSP during the year."
Canuck
Tuesday, February 24, 2004
>> My father has been a CA for almost 40 years and his council has been invaluable.
Lucky you :-)
Canadian Contractor
Tuesday, February 24, 2004
I still do not understand why you do not have to pay EI. If you make yourself an employee of the corporation can you get away with not paying EI? Or is there another way to do it? What are the rules regarding EI?
Just incorporated
Tuesday, February 24, 2004
>I still do not understand why you do not have to pay EI. If you make yourself an employee of the corporation can you get away with not paying EI? Or is there another way to do it? What are the rules regarding EI? <
I think in our case, if you own more than 40% of the shares in the company you are not eligible to collect EI, thus you don't have to pay EI. It doesn't matter that we are also paid as employees of the corporation.
Jay
Tuesday, February 24, 2004
Top three documents from CCRA that you really should read:
The Business Number and your CCRA Accounts
(http://www.ccra-adrc.gc.ca/E/pub/tg/rc2/rc2eq.html)
Guide for Canadian Small Businesses
(http://www.ccra-adrc.gc.ca/E/pub/tg/rc4070/rc4070eq.html)
Employer's Guide - Payroll Deductions - Basic Information
http://www.ccra-adrc.gc.ca/E/pub/tg/t4001/t4001-02-e.html#P286_13952
You don't have to pay EI, because you can't claim it, because you own more than 40% of your voting shares (I assume, anyway) - I was wrong about when I said 50%. Basically, some income is not "insurable" because in theory, if it were insurable, you could more easily commit employment insurance fraud. Eg. by laying yourself off.
In your specific case, whether you are an employee or not, you won't have to pay EI unless you sell more than 60% of your voting shares to someone else. It's not a question of "getting away" with anything. If your company fails, you can't apply for EI using your company earnings. The employer part of the EI rules are explained ad nauseum in Chapter 3 of the Payroll Deductions - Basic Information (http://www.ccra-adrc.gc.ca/E/pub/tg/t4001/t4001-04-e.html)
Since as a small business owner you are not entitled to this particular social safety net, you don't have to contribute to it either.
Phibian
Tuesday, February 24, 2004
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