Wednesday, May 4, 199

4 - North Shore News - 49

Incorporation helps te defer annual taxation

Personal tax rate can differ by up to half of what a small business must pay in annual taxes

Ki

DOLLARS AND SENSE

THE LATEST federal bud-

. get left the RRSP rules
unchanged for now, although
it proposed a review of cll

_retirement income programs.

Whether or not Ottawa eventual-

“Jy culs the contribution limits, you
should always be looking for ways
to save tax. 4

People who have a source of

‘self-employment income, a sideline -

- or full-time business should see if
incorporation might make sense,
and if they already have a company,
they should look closely at the best
ways to take funds out of the busi-
ness. : a

Each case is different, bul gener-
aly, having a company can often
help to save or‘at leasi defertax,

_ especially if you have family mem-

. bers who pay jittle ar no tax and/or
you earn more than you spend;

* An active smai! business pays as

little as about 23% tax (the rate

varies from province to province) on
its first $200,000 of taxable income
compared to a top personal rate
exceeding 50% in most provinces.
(An investment-holding company
generally pays tax around 45%),

. When you retire from your com-

pany, vou can pay yourself a retin.
ing allawance which can be rated
tax-free into vour RRSP, within
limits.

You can setup a pension plan in
your company. You can often save
tax when you seli a company's
shares rather than it vis. You
also, have more flexibility in estate
planning.

The company can pay you and
other family members a different
mix of salaries. dividends and
bonuses each year to provide the
best tax advantage, depending on
the tax rules and financial situation.

But, warns F. R. Dalgleish of
chartered accountants Dalgleish &
Co., incorporating doesn’t automat-
ically save you money.

At certain income levels, pay
dividends or salaries praduces t
same after-tax results.

“With dividends. you can’t pay
into the Canada Pension Plan,” he
adds. “You cant make RRSP con-
tributions based on dividend
income. The costs of preparing
books, records and financial state-
ments for a company can often be
four to five times the cost of a per-
sonal tax return.”

Elio Luongo. of KPMG Peat
Marwick Thorne, chartered accoun-
tants, stressed that everv situation is
different. “You have to look at each
individual case to see whether it
makes sense to incerporate and, if
so, how to pay out its earnings, or
indeed whether to keep a company
if you have one but your situation
has changed,” Luongo said. “In
some businesses, the spouse or chil-
dren can’t be paid salaries because
they aren’) in a’ position to provide
any services. In such a situation, the
only tax planning alternative may
be to pay dividends, either directly
or through a family trust.”

Luongo said you should review
cach year whut mix of salaries, divi-
dends and bonuses will give you the
best result. For example, it can often
make more sense to keep as much
money as possible within the Gom-

At certain times in your life you need the’ protection offered
by Guaranteed Investment Certificates (GIC's). Wou may be

retiring soon and want.to avoid exposing your funds to risk,

or you may be saving for a home, and cant afford to wait to

realize long-term investment growth. Bn situations like these,
GIC's are the best investment alternative and Citizens Trust

has the one fer you,

We are offering GIC’s
maturing September 1998 at

a Amey 0
: 2 compounded ananally

Plus, depositors bringing in new funds of $50,000 or more

(excluding existing funds or rollovers) will receive a free
Citizens Trust Umbrella, while quantities last. @all 983-3773
North Vancouver Branch, 202-1217 Lonsdale Avenue, near the

corner of 12th at Lonsdale, North Vancouver.

*Sulyect te change without notice

Citizens Trust

Better than Money in the Bank

ruse MEMBER CANADA DLPOSIT INSURANCE CORPORATION

pany (while stil preserving tie low
staal business tix cate} than to pay
a higher salary, evea if
that means the individ-
nal wou tbe able to
make the maximum
RRSP contribution.
vaving out an addi-
tional dollar to some-
body in the top tax
bracket means aboul SU
ceats will go to Ottawa,
while the individual
will be able to con-
tribute only another 18
cents to.an RRSP to
save nine cents in tax.
That's an effective tux rate of
more than 40% compared with
about only 23% if that dolar is left
in the company, so it pays the tax.
Another example: Having, a
CNIL (cumulative net investment
loss) balance since 1988, can
restrict your use of the capital gains
exemption to offset capital gains
realized until last Feb. 22.
Having your company pay you
dividends (invesiznent income)

66 Even if you have a relatively small
but profitable sideline business ...
incorporation could ailow income-

splitting and tax savitig/deferral. 9%

small but profitable sideline. incor-
poration could allow invome-split-
ting and tax
saving/deterral.

Weigh such bene-
fits against the costs of
setting up and operat-
ing 4 company.

Mike Grenby is a
North Shore-based
columnist and inde-
pendent — financial
advisor who works
with individuals. He
will answer your ques-
tions in this column as
space allows, Write to him clo 2444
Haywood Avenue, West Vancouver
V7V IYI.

instead of salary this year can
reduce of eliminate a CNIL balance

and allow mare use of the exemp-
tion.
Even if you have a relatively

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