Keeping the Government of Canada solvent
Small businesses have until March 31, 2010 to remit their annual GST collections (assuming they make less than $1,500,000 in taxable sales a year), assuming their regular year-end is December. Assuming such a corporation makes less than $500,000 in taxable income, they also have until March 31, 2010 to remit corporate income taxes and fill in form T2, which is a significantly more complicated version than the personal income tax form (T1).
Since interest rates are going to be nothing between now and March 31, 2010, I decided to spend a couple hours of my weekend and do my taxes to get it out of the way. My home-brew accounting system (essentially a sophisticated excel spreadsheet) already has a provision for making sure I properly and accurately account for holding back enough GST and income taxes so that I’ll be able to pay the government.
The largest government impact between 2008 and 2009 was the reduction of small business taxes in British Columbia, which went down from 4.5% at the beginning of 2008 to 2.5% on December 1, 2009. The weighted average rate for BC in the 2008 year was 3.9167%, while the average rate in 2009 was 2.5%. While a 1.4167% difference does not seem large, it does result in a non-trivial savings in tax. This capital I can either choose to plough back into the business, or take it out in the form of a dividend, depending on how comfortable I feel about investing my company’s capital or my own capital.
The provincial government apparently wants to reduce small business taxes down to zero, which would result in a further 2.5% savings on corporate income.
I have said this before on this site, but if you can shift your income from employment to business income, there is a significant tax benefit involved – first because you don’t have to pay CPP and EI, but secondly because your after-tax pay will be somewhat reduced – by about 3.8% in the lowest tax bracket, and about 2% in the highest tax bracket. So if you are a low income earner, you stand to alleviate yourself about 10% of taxes (3.8% income and 6.7% for CPP+EI premiums) that you otherwise would have paid as an employee.
The downside of incorporating is paperwork – at a minimum, you have to register with the government ($325), file a $45 annual report, maintain a corporate bank account, maintain accounting records, and file income taxes/GST yearly. Assuming you can do this cheaply, it is worth looking into.