If you are running a corporation that falls under CCPC (Canadian Controlled Private Corporation), you might be faced with the decision of leaving extra funds in the corporation and invest it or pay yourself salary and then invest it.
First take a look the tax rate for CCPC and personal tax rates
There are good documents on KPMG website
Personal tax rates and brackets
I am taking a simple example of an Alberta corporation (or a Alberta based federal corporation).
Corporate Profit before paying any salary – 100,000$
You need 20,000$ and rest is disposable income (can be invested)
Return on investment – 10%
Case1 – Pay everything as salary
20000$ – tax (approximately)
80000$ – In hand salary
20000$ – Spending
60000$ – Invested
6000$ – Return before tax
6000*0.26/2 = 780 – tax (marginal tax rate is 0.26 and 50% capital gain is taxed)
6000 – 780 = 5220 – final return
Case2 – Pay minimum required in salary
25,000 – salary
75,000 – Corporate profit
75000*0.161 = 12075 – tax (small business tax is 16.1%)
75000 – 12075 = 62925 – Invested
6292.5 – return before tax
6292.5*458/2 = 1440 – tax
6292.5 – 1440 = 4852.5 – final return
This will be paid as salary and will reduce corporate tax.
4852.5(0.26 – 0.16) = 4365.25 – final return
If you invest personally, your final return is higher.
However, this example is oversimplified. It assumes that the money will be invested at year end. Normally, money will be invested more frequently and much earlier. That would increase return in Case2. Bottom line is that there will be very little difference and you should consider factors like marginal tax rate, expected rate of return on investment and whether you need money for corporation or not.
