Tuesday, 22 January 2013

Employees! Think Twice before Incorporating


If you are asked by your employer to  incorporate and believe that you will be  enjoying the small business tax rate of 15.5% and also will be allowed to deduct lot more expenses, think twice. This proposition is not without significant risk.

 Many employees have incorporated and report their corporation's income as if the corporation fitted the definition of a small business corporation and pay the tax at the rate of (in 2012) 15.50%on the first $500,000 of their taxable income.  If their work did not fall into the definition of self employed their corporation's tax, rate shot up to 26.50%.Recently this rate has increased to 39.50% for corporations with year ends starting after 31st October 2011.Therefore most corporation with fiscal years ending after 31st of October 2012 could be subject to this increased rate. Such corporations are referred to as Personal Service Corporations or sometimes as Corporate Employees and unfortunately only deductions available to employees can be deducted from their taxable income of such corporations. The idea behind this legislation is to dissuade employees from incorporating while continuing to perform the same functions   

 in order to benefit from the low rate (15.5%) of corporate tax. There are number of factors that Canada Revenue Agency (CRA)looks at for determining whether a person engaged by an employer is self employed. or an employee. Some of them are:
Does the individual:
  • works under supervision?,
  • uses his or her own tools?/
  • works for other clients.?
  • enjoy the same benefit as other employees
  • have a contract with the corporation that specifically allows other work.
  •  
Check CRA's guide RC4110 

http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-12e.pdf

This blog is for general information only and cannot replace professional advice.
The reader is invited to contact the writer to discuss the contents of the newsletter.
Readers are advised to seek professional advice before acting on the material
in this newsletter

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