Tax planning for a small corporation isn't about tricks: it's about making a few decisions at the right time each year. Here are the ones that matter most for owner-managed corporations in Quebec.
1. Salary, dividends, or both
How you pay yourself is the biggest yearly decision.
- Salary is deductible for the corporation, creates RRSP room and QPP pension entitlements, and gives you a T4 income that lenders like. It also means payroll contributions.
- Dividends aren't deductible for the corporation and create no RRSP room or QPP, but involve no payroll contributions and are taxed at lower personal rates thanks to the dividend tax credit.
The right mix depends on your income needs, your retirement plans, and whether the corporation qualifies for the small business rates. It's worth recalculating every year.
2. The small business deduction
A Canadian-controlled private corporation pays a reduced federal rate on its first $500,000 of active business income. In Quebec, the reduced provincial rate comes with extra conditions, including a minimum number of paid hours of work in most sectors, so many one-person service corporations pay the general Quebec rate. Knowing which rate applies to you changes the salary-or-dividend answer.
3. Year-end bonuses
A corporation can deduct a bonus declared at year-end if it's actually paid within 180 days after the year-end. This can move income from the corporation to you, or the reverse, depending on which is taxed less.
4. Timing equipment purchases
Equipment, vehicles and computers are deducted over several years through capital cost allowance (CCA). Buying needed equipment before your year-end, rather than just after, can bring the deduction forward a year. Buy it because the business needs it, not only for the deduction.
5. Paying family members
Paying a spouse or adult child a salary is allowed when they do real work for the business and the pay is reasonable for that work. Keep a record of what they do.
6. Shareholder loans and personal expenses
Money you take from the corporation that isn't salary, a dividend or a repaid expense becomes a shareholder loan. If it isn't repaid within one year after the corporation's year-end, it's generally added to your personal income. Keep personal expenses out of the corporate accounts.
7. Should you incorporate at all?
Incorporation pays off when you earn more than you need to live and can leave profits in the corporation. Our guide When should a small business incorporate? walks through the numbers.
Plan before your year-end, not after
Most of these decisions have to be made before the fiscal year ends. Book a one-hour tax consultation ($125) a couple of months before your year-end, and we'll run the numbers with you. Our tax planning service and corporate tax service are offered at a fixed price; ask for a fixed quote.