Can You Save Tax By Opening A Small Company In Canada?

In Canada’s soaring economy, many people are considering starting their own businesses due to the progressive tax rate. Opening a company can provide separation between personal and business responsibilities and offer tax planning opportunities to save tax. This article outlines the tax benefits of starting a business in Canada and emphasizes the importance of “tax planning”. It focuses on taxes for small and medium-sized companies with annual revenue of less than $500,000, which is within FinGems’ area of expertise.

Which form is used for opening a corporation for tax purposes?

T2 is the tax return for Canadian corporations and T1 is the tax return for Canadian individuals.
T1 is for Canadian Individuals.

What do I need to file a tax return for a one-person corporation?

Balance sheet # Income statement, TeA
These two forms are required to do the usual bookkeeping or to do your own bookkeeping, and are needed at the end of the year when you need to file your corporate tax return. For example, the most common bookkeeping program Quickbooks can export these two forms. Generally, with these two forms, the tax preparer can base on them to file the corporate tax return.

Can you really save taxes by opening a company?

When it comes to opening a company, there is a common misconception that you can save tax or even not pay tax. In fact, the main significance of opening a company in the tax is: first spend money and then pay taxes (more expenses can be deductible), while personal tax is often the first to pay taxes before spending money (very few personal deductible expenses).
The company can deduct a number of such as travel expenses, entertainment and banquet expenses this kind of can effectively reduce the company taxable amount, so as to reduce the company’s personal tax. Of course, for small and medium-sized companies, the company’s profits, whether as wages or dividends to the team (including the owner himself), have a certain choice of space. Corporate tax + personal tax, usually for small and micro companies with annual revenue of $500,000 CAD, because of the preferential tax rate, even if it is corporate tax plus personal tax, usually it will be lower than the personal tax of fully self-employed.

An example of a one-person corporation:

Paying yourself: you can lower your corporate personal taxes as a corporate expense deduction, but at the same time you need to pay both employer and employee CPP Contribution and counted as part of personal tax income (may push up the marginal personal tax rate), but at the same time there will be some more room for RRSPs.
Pay dividends to yourself: not as a company expense deduction can not reduce the company’s personal tax, but because the dividends of about 15% tax rate will not be progressive so it can effectively reduce personal tax, will not increase the RRSP space.
So open a small company in the end is payroll or dividends, or according to their own company as well as their own financial planning to decide.

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