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I own a small business which is incorporated. When I file my personal income tax, it asks if I am self-employed. Do I say "No" because a corporation is not considered being self employed. I assume I don't need to report any income from the corporation on my personal income tax; only when I file my corporation income tax. Is this correct? Please help. I would like to do this correctly. There has been little activitiy on the corporation so it is something I will do myself with Quickbooks rather than hire an accountant.
 

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My understanding is that a corporation is a separate legal entity. So you are correct in saying that you do not report your corporate income with your personal income tax return. If, however, your corporation paid you a salary or dividends, that would need to be reported.
 

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wow, that was quick. This forum is superb. I have not paid myself a salary from the corporation so it makes sense that I don't have monies to report on my personal income tax. Thanks again for your reply!
 

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wow, that was quick. This forum is superb. I have not paid myself a salary from the corporation so it makes sense that I don't have monies to report on my personal income tax. Thanks again for your reply!
Do you have another source of income ? 'cause if you don't CRA is going to wonder how you can afford to live on nothing.


Can you say "net worth audit"?
 

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The small business we incorporated has only been open the last 6 months. So far we have not made any money after expenses are tallied. This is why I have not deducted a salary from it. There is no money to deduct for salary. We live off my spouse's income. House and cars were paid for years ago. Thanks for advising me about this kind of audit. This forum is great. So much to learn.
 

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When you do start making money, if not immediately needed, save and invest it within the corporation. You will pay corporate income taxes on profits, but they are lower than personal income taxes. When you want to take money out of the (profitable) corporation, take a dividend. This will be taxed in your personal account, but the tax rate will be lower than if you took the same money out as salary. And if you have waited a while, and the invested profits have (hopefully) grown, you will have deferred some of the taxes and ended up with more money in the corporation. Further, if your family members are shareholders, issue the dividend to the (trustworthy) family member who is earning the least income (e.g. your teenage child). He or she will pay minimal or no personal tax. If said child is old enough to do jobs for the corporation (e.g. cleaning the office or doing the books) pay for that work. The child's income will now be a corporate expense and will reduce taxable corporate income. Finally, if the corporation's invested profits produce capital gains, there will be a (virtual) capital dividend account. You can then issue a capital dividend for 50% of that amount, with no tax consequences.

These are some of the insights my accountant has taught me...including when to take the capital dividend. Are you sure you don't want an accountant? Think about it, at least after your corporation starts to make money.
 

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A couple of things here. First, investments such as stocks and bonds held within a corporation are taxed at a very high rate, so they can't be sheltered that way. Second, taking a dividend is nice, but don't forget that dividends do not provide RRSP room, since they don't count as earned income. It may be preferable to take a proportion of salary and dividends. It may also not be a bad idea to reevaluate if you really need a corporation... the added expenses compared to a non-incorporated business only start to make sense when income reaches something like the $100K mark. You need to "hold" annual meetings, file with CRA, prepare income tax for the corporation, etc. And the so-called limited liability is thinner than many people believe, especially for a small business where there is such a clear link between the owner and the company's actions.
 

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Another thing to note is that if you are the sole shareholder, withdrawing funds from the corp as a dividend will work out to be the same as withdrawing as salary. The reason being is that dividends are withdrawn with after tax corporate dollars, whereas salary is tax deductible to the corp.

The advantage of a corp is if you set it up for dividend sprinkling. That is, having a spouse as a shareholder in their own share class. With that you can distribute dividends to whichever class works out best tax wise.
 
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