Excerpt from Professional Corporations – Why Incorporate

In a nutshell, it can be the difference between an 88-cent dollar and a 50-cent dollar. It’s the difference between being able to choose which government programs you want to access and which ones you want to establish yourself. It’s about being able to defer paying all your personal income tax in the year it’s earned. In the end, it’s about giving yourself choices.

Individuals in Canada are taxed on their worldwide income, and tax rates federally are applied to all provinces and territories. The current federal tax rates range from 15 to 33 percent depending on the amount of taxable income. Provincial and territorial rates range from 4 to 21 percent. On a combined basis the tax payable by individuals ranges from 19 to 54 percent.

Compare this to corporate tax rates; on the first $500,000 of “active business income” in most provinces, the tax rates range on a combined federal and provincial/territorial basis, from about 12 to 18 percent. In B.C., for example, if you earn $250,000 and pay tax as a self-employed individual you would pay approximately $95,000 in income tax and CPP (Canada Pension Plan) contributions. That would leave you $155,000 for paying personal bills and for investment. Let’s now assume you are incorporated and earn $250,000; if you left the whole amount in the corporation you would pay about $30,000 in income tax leaving $220,000.

Now, it doesn’t make sense to keep all $220,000 in the professional corporation because you’ll need the money to pay personal bills. But don’t worry, in chapter 8 we’ll look at how you move money in and out of a professional corporation. Until then, just bear in mind that there is more money available because you initially paid less tax.

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