Maximizing the use of your corporation Part 1

There are many factors to discuss in the topic of “Maximizing the use of your corporation”.  Educational articles should never replace good planning!  Knowledge is empowering but Wisdom to apply the knowledge is key!  Always combine planning with education.  Our goal at Kustom Design is to give you the best of both of these in the areas of tax, accounting and finance! 

One area to look at in maximizing the use of your corporation is the Small Business Deduction.  The Small Business Deduction is how a corporation typically pays much lower tax than individuals.  However, there is a limit (Small Business Deduction Limit).  Currently the Small Business Deduction is claimable by most Corporations in Canada and has a limit of up to $500,000 net income.  In laymen’s terms you can earn up to $500,000 Net Active Business Income in a corporation before you pay large tax rates.  Currently in Alberta you only pay 14% total Corporate Tax (Federal & Provincial) on net income up to $500,000 in your corporation.  Once you make over $500,000 net in an Alberta corporation you could be looking at your tax rate going from 14% to upwards of 39%.  So our goal is of course to pay the lowest tax for as long as possible.  We have many options, which could include:

1.      Structuring multiple corporations (non related) to split profits

2.      Using trusts in your structure

3.      Paying bonuses and other forms of remuneration to owners, employees etc.

There are always ways to save tax as you will see with Kustom Design!

In talking about the Small Business Deduction we also discussed net active business income.  Gross income is the full amount of income you take in to your business and net income is after all of your expenses, leaving the net income or net profit/loss.  In the case of the Small Business Deduction we are talking about net active income.  So now that we understand the word net, we must also understand active income.  The 2 main income categories are active and passive income.  Active income typically means you or someone else has to work for the money.  Passive income typically means that you are making money whether you work or not. Passive income is great and residual passive income is the best!  In the case of the Small Business Deduction we are talking about active income.  So that deduction will not apply to passive income, such as investment income, Capital Gains and rental income.