Week 3

Question 1

Disadvantages to incorporation

Answer 1

• Incorporation costs
• Annual filing costs
• Annual accounting costs
• Annual legal costs
• Losses are trapped in the corporation
• More difficult to access cash in the corporation.

Question 2

Advantages to incorporation

Answer 2

• Limited liability (unless personal guarantees)
• Income splitting (spouse, non-minors) limited by TOSI
• Estate planning to transfer future growth
• Availability of registered pension plans
• Flexibility in timing of salary, dividends
• Continuity of separate legal entity on death
• Easier access to financing
• Availability of CGE

Question 3

Tax cost

Answer 3

Unincorporated Personal Tax
Less Than
Incorporated Corporate + Personal Tax

Question 4

Tax saving

Answer 4

Unincorporated Personal Tax
Greater Than
Incorporated Corporate + Personal Tax

Question 5

Employment Remuneration (salary and bonuses)

Answer 5

• Must be reasonable – Section 67
• No guidelines on what is reasonable – a question of fact
• If paid to arm’s length employee, generally any amount is ‘reasonable’
• If paid to controlling shareholder-manager, CRA generally considers any amount ‘reasonable’ because profits are due to owner’s efforts/work
• If paid to family member of shareholder reasonableness must be supportable

Question 6

If salary/bonus is paid to arm’s length employee…

Answer 6

If paid to arm’s length employee, generally any amount is ‘reasonable’

Question 7

If salary/bonus is paid to controlling shareholder-manager…

Answer 7

If paid to controlling shareholder-manager, CRA generally considers any amount ‘reasonable’ because profits are due to owner’s efforts/work

Question 8

If salary/bonus is paid to family member of shareholder…

Answer 8

If paid to family member of shareholder reasonableness must be supportable

Question 9

Unpaid remuneration

Answer 9

• Must be paid within 180 days after year end
• Must be a liability to pay (not contingent)

Question 10

Shareholder-Manager RemunerationConsiderations

Answer 10

• Cash needs of the shareholder-manager
• Cash needs of the business
• Tax rate of the corporation
• Personal tax rate of the shareholder-manager
• Available personal tax credits
• Personal preferences of the shareholder-manager (i.e., RRSP contributions, CPP contributions)

Question 11

Salary vs. DividendsTrade-Off

Answer 11

• Dividends not deductible by the corporation but personal tax reduced by dividend tax credit
• Salaries deductible by the corporation but subject to personal tax

Question 12

Tax treatment of salary payments

Answer 12

• Taxable at graduated personal tax rates
• Deductible to corporation (Must be paid within 180 days of year end)

Question 13

Considerations of salary payments

Answer 13

• Creates RRSP room
• Can participate in CPP, RPPs
• Can claim a child care deduction
• Use up non-refundable tax credits
• Payroll remittances required, CPP, Income Tax
• Can split with family members who are employees (reasonable)

Question 14

Tax treatment of dividend payments

Answer 14

• Non-eligible LRIP Dividends 15% GU/DTC
• Eligible GRIP Dividends 38% GU/DTC
• No deduction to the corporation

Question 15

Considerations of dividend payments

Answer 15

• Tax free if other sources of income are low due to personal tax credits
• Reduces CNIL balance
• Dividend resolutions required
• No remittances required
• Can income split with family members (not minors) holding shares (limited by TOSI)