Are you or are you planning to set up a Small business corporation in Canada? You can enjoy tax-free benefits from your corporation, there are a number of benefits that you may be eligible to receive and that too tax-free, this guide will tell you exactly how. You may take out a salary in your name or receive dividends, you can even take out a company car, enjoy a pension in the future and enjoy medical benefits. There are many advantages and disadvantages involved with such tax-saving benefits so you must understand the whole scenario and choose in accordance with your financial situation.
How to get tax free benefits from your corporation:
1. Receive a salary
You can assign yourself a salary from the corporation this will mean that you will be building for yourself an excellent retirement plan, you will be drawing yourself a salary and at the same time contributing towards the Canada Pension Plan, this will be your tax-free retirement benefit, the benefit depends on for how long and the amount you contributed towards your retirement plan from your salary.
The salary that you pay out to yourself will amount as a tax deduction to your own corporation so that’s an added benefit of drawing a salary. If you want to enjoy more tax-free benefits you could even pay a salary to your spouse or child but make sure it seems realistic you don’t want to catch the attention of the CRA income tax department. So by setting up a salary for yourself, you can enjoy lower corporate tax returns.
The only cons of drawing a salary are that it isn’t 100% tax-free, salaries are taxed but you can enjoy lower corporate tax returns.
2. Receive dividends
There are advantages of receiving dividends from your corporation, compared to a salary you must pay fewer taxes on dividends, it is possible to declare how many dividends you own, it is simple to pay yourself a dividend all you have to do is ask your accountant to write a cheque in your name and put it into the accounting book or minute book of your corporation when the year ends you just declare at the director’s resolution that you received a dividend.
You also need to know that whilst receiving dividends has its advantages there are also some disadvantages involved that you should be aware of before you make the decision. Even with dividends, it is not necessary to contribute towards your Canadian pension plan, if you do not pay the right amount this can affect your pension plan in the future and nobody wants to have a distraught corporate tax return post-retirement. There is another problem associated with receiving dividends if you are receiving dividends and not a salary you cannot claim such as childcare cost on personal taxes.
On the other hand dividend taxes are lower than the tax that you pay with a salary, it is simpler and does not require a whole payroll and it is easy to declare the dividends.
3. Get a company car tax free
Do you need a new car on the lease? You can lease a car on your corporation and you can then add the lease payments to your business expense and have the lease written off. If the leased car is being used as a personal car you cannot still lease it under a business expense. The biggest advantage of such a lease is that only 2/3rds of the lease that your corporation pays is personally taxable to you and if you are actually using your car for business purposes at least 50% of the time you can enjoy more taxable benefits through corporate tax returns. You must, however, ensure that you have made a proper contract and your company’s name is on the lease agreement.
4. Medical benefits
There are even medical benefits that you can tax-free on your corporation in Canada, you can get basic medical expenses such as dentist fee, optician fees, prescribed drug costs, hospital charges charged by your corporation and you will not be personally taxed on these and even better that you even get a write off on these expenses on your corporation expenditure.
Under the Canadian income tax Act, health insurance for corporations are entitled to deduct under corporate tax returns or tax deductions on health insurance. Corporations and employees can benefit from such advantages as they are often protected by health insurance plans of the company.
5. Pension plan benefits
As we mentioned above that you can contribute towards your own pension by claiming a salary in your own corporation, receiving a simple state pension can often not amount to enough and can be an insecure retirement plan. Corporations can help you get higher pensions and improve what you get after your retirement.
You basically make contributions towards your corporation’s insurance company and in return, you create an effective pension plan for yourself which is corporate tax returnable. It is similar to what the government pension plan looks like your contribution is stored as shares and bonds and is basically an investment, after you retire your investments will be returned to but as a fixed deposit, you will be paid a certain amount depending on your contribution on a monthly basis and these investments, so you can enjoy your retirement fully without any stress.
Therefore, from the above stated it can be concluded that business owners should make decisions in regards to their corporations depending on their financial situations but they can benefit heavily, they can create for themselves a comfortable retirement plan and enjoy a pension in the future, they can make investments that they can benefit and they can even reduce their medical expenses and lease a car on lower taxes.