“Tax Talk”
Or How to Minimize Taxes
for The Self-Employed
By Leslie Slater, CA, MBA
Topics to Be Covered
Similarities and Differences between
incorporated businesses, and
unincorporated
Income taxes
 Ownership structures
 Paying yourself
 Paying family members
 Taxation of profits

More Topics
Expenses of car, home office, meals and
entertainment, travel, etc.
 Health Spending accounts
 IPP’s
 CPP, GST, PST
 SRED and other government programs

Final Topics
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Salary/Dividend Decision
New Dividend Tax Credits
Should you incorporate?
Your employees – how can you help them
and yourself
Incorporated Companies
Separation between you and your company
Ownership can be you, other business
partners, your spouse, adult kids, a family
trust, other corporations
Corporation pay its own federal and provincial
taxes separate from you
You are paid salary/bonuses & dividends
How are you really paid?
If draws due to inconsistent cash-flow, then
need to either show self-employment income
or dividends
Don’t want it to be a series of loans and
repayments
Company then doesn’t pay employer CPP
Shareholder loans/draws need to be zero at
end of your fiscal year
Important Tax Rates
CCPC are charged 18.6% in Ontario on
first $300k of active business income –
then pay dividends after corp tax
Increasing to $400k January 1, 2007
Ontario lowered rates on $400k so there
is a another tax bracket – 26.3%
Over $400k, pay 36.1%-40.8% on ABI
New Dividend Tax Credit
For dividends paid out of earnings not
subject to federal small business rates
or investment income (after Jan 1,
2006)
So not relevant to the salary/dividend
decision below $300k (moving to $400k)
Salary versus Dividends
At all levels of corporate income, there is
deferral of taxes for income left in the
company and invested since corp rates are
less than personal rates
But will pay high taxes on the investment
income unless pay it out to shareholders
Ultimately about 3% less taxes by paying
dividends versus salary
And salary attracts CPP, EHT
So how do I make the
decision?
Generally bonus down to SBD until
2010 when rate changes may make you
neutral
Below SBD, pay dividends unless you
are already below SBD before start
If below $300k when you start, do you
pay dividends or salary?
Salary, dividends or
leave it in?
Salary is
earned income for RRSP,
 subject to CPP,
 part of EHT calculation on total payroll
 Considered for debt servicing levels
 So generally pay tax until reach levels for
desired RRSP and debt servicing
 Max 2006 $106k x 18% = 19,000 if desired

Leave it In?
Tax deferral –i.e. no personal taxes yet
But need to watch how big your investment
assets get – 50% of assets for 2 year, 90%
Income on investments taxed at high rates if
not needed during business cycle
Refundable taxes if pay out dividends ($1:$3
ratio)
So The Decision
Leave cash in the business if
don’t plan to sell within 2 years,
 below the $300k (soon 400k) and
 you are at your desired earned income
levels
 but watch you don’t build up too much
 Have income split to lower tax brackets
with family members

Income Splitting with
Family
Can pay high reasonable amount for
work done
Have to actually pay them; and get
invoices if they are contractors
Spouses can be partners or
shareholders
Family Trusts can be partners or
shareholders
Income Splitting Cont’d
Sole proprietorship – pay for work done
Partners – + allocate partnership profits
Shareholders – dividends (but not to minor
children), duplicate capital gains exemption if
sell shares (but need to pay them)
Many considering everyone in a family trust
for maximum discretion on allocations
Similarities between
Corp & Other
Paying family members for work done
Home office as principal place of
business
Meals and entertainment
Travel
GST, PST
Differences
Car
Paying family owners
Health spending accounts vs group
medical
CPP
SRED and other government programs
IPP’s
Home Office
Principal place of business; all costs (except
mtg princ) x sqft/sqft or #rooms
Consider market rates to charge incorp co
Rental income on your personal tax return
Lease with company
If not princ. place, then regularly and
continuously meet clients there and exclusive
business use (court cases)
Meals and
Entertainment
50% deductible by company or selfemployed
50% for GST Input tax credits
Keep track of who you entertained on
the receipt to show business purpose
Don’t want to be shareholder
appropriations if incorp; double taxation
GST
Need to register where >30k last 4 quarters
Start usually as annual filer and remitter
Move to quarterly remitter or filer based on
first year
If have a refund always (e.g. US sales and
Cdn costs), then want frequent filing
CRA doesn’t like sending big refunds
GST cont’d
Value added tax – difference between
amount charged and amount paid
Have to keep track to both unless use
other method
Quick method – $200k limit
6% as of July 1, 2006 changed rates for
calculations
GST over the Internet
If US resident – zero-rated but you have
to have declaration from them
What are you selling – an intangible or a
service (software can be either)
If wholly outside Cda, not required on
service
If intangible with right to use in Cda GST
PST
Sales tax, not value added tax
Consider all items that go into your
product

E.g. software companies might provide
owners with CD’s, paper manuals, use
development computers and can buy these
without PST
PST over Internet
How and where delivered
If delivered electronically, servers outside
Ontario and can’t download in Ontario, then
no PST
If can download in Ontario, then PST
If delivered in other provinces, may have HST
(BC based on if you do direct advertising)
Complicated so check it out
Car
If self-employed, write-off the business
proportion of all your auto costs (s/t max
$800/mo, 30k cost)
If corporation, then difference if company
owned or leased (taxable benefit) versus
personally owned or leased
If personally owned or leased, can charge
company .50/km first 5,000 and $.44/km over
and no taxable benefit or chg allowance
(taxable income)
Health Spending
Accounts
Health Spending Accounts only available to
corporations
You make a contract with your company to
cover list of medical expenses and put a set
monthly amount in separate bank account
each month until employee submits the
medical expenses and gets reimbursed
Account is not considered part of company
books
Health Spending
(cont’d)
No maximum, but should do set monthly
amount
Unlike group premiums for self-employed
where get to deduct $1,500 for self, $1,500
for spouse and $750 each dependent child
from business income (not incl life, ltd)
Need to establish for all employees
Monthly amounts are deductible to co; not
taxable benefit to employee
CPP
If incorporated, then company pays employer
portion of CPP
Self-employed pay both sides when file their
personal tax returns – 9.9% of 42,100, max
$3,821 in 2006
If within 15 years of retirement, want to
ensure that you are maximizing your CPP
contributions
Can receive as early as 60 (reduced); normal
65
SRED
SRED is Scientific Research and
Experimental Development
Only available to corporations
Important cash incentive to software
companies & manufacturers in Cda where
contribute to tech advancement and where
there was tech uncertainty
Pays $ even if don’t pay any income tax
Approved SRED can be collateral for bank
loan
Other Government
Programs
Mainly focused on corporations
Some provide cash even if no taxes,
some match funds (e.g. IRAP) and
some provide income tax credits against
taxes payable
Ontario has some focused on media
Also, there are government funds
looking to encourage innovation
IPP (Individual Pension
Plan)
Can define a smaller group (you, your
partners, but not general employees) to be
covered
Corporation - need employee relationship
IPP’s useful to accumulate larger amts than
RRSP’s, get company deduction, if around
50, steady corp. cash-flow, and have been
running the corp. for a number of years
Companies will calculate benefit and consult
for free; set up costs coming down
So Should You
Incorporate?
If you make more money than you need or
want to live on – yes, tax deferral at least
If there is liability risk – yes, corporate veil
If there are contracts which are not
assignable
If you have income splitting opportunities with
spouse and/or children
Incorporation
Advantages
If you think you qualify for SRED or
other government programs
If you think you’ll be in business for a
while and ultimately sell – capital gains
exemption
If you might want do retirement planning
(IPP’s) or health spending accounts
But what about your
employees?
How can you help them to minimize their
taxes?
Specify in employment contract that they
need home office (e.g. technology workers)
with internet connection, cellphone, and
personal computer; car also
Give them a T2200 to write off these against
their employment income
Other Ideas for Your
Employees?
If they negotiate contracts, pay some of
remuneration as commission and specify as
such on T4 slip
Commissioned employees have more writeoffs than salaried – even their fees for income
tax preparation
If they pay part of their benefits, specify it
covers the life and long term disability part
To Conclude
When you start a business, you may not
incorporate, so you can write-off losses
against your personal income…but if the
business is going to continue, it usually
makes sense to incorporate
There are more opportunities for tax deferral,
income splitting, estate planning, health care
deductions, retirement planning, etc.
So make sure you are getting all the possible
advantages