Should Mitra, 55, incorporate her successful consulting business?

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Incorporating can provide several benefits, but the most impactful will be the ability to defer personal income taxation, expert says

At age 55, with her consulting business growing, Mitra wonders if it makes sense for her to incorporate. Her revenue is $174,000 a year “trending toward $200,000,” she writes in an e-mail. After business expenses and income tax, she nets about $122,200 a year.

“Is it really worthwhile to incorporate given my circumstances, or is it just six of one and half a dozen of another?” By changing the income from personal to corporate, the active business income will be to the corporate tax rates, which are generally lower than personal rates. “This can provide a meaningful advantage as long as the surplus funds stay in the corporation,” the planner says.deduction, which lowers the federal income-tax rate on the first $500,000 of active income. “The result is the ability to be taxed less today and to have more after-tax income to accumulate for retirement,” Mr. Calvert said.

If Mitra proceeded with incorporating, it would alter her balance sheet and the location of her investable wealth. For instance, with her gross business income, after paying her a $90,000 salary, business expenses and income taxes, she would retain about $50,000 in her corporation each year. She’ll be drawing money from her RRSP, TFSA and corporate investment account. “Withdrawals from an RRSP, a corporation, and a TFSA have very different tax consequences,” he says. “Having many options increases her toolbox for cash flow and tax planning opportunities.”

When Mitra retires at age 65, her RRSP should be utilized in the first year of low taxable income. Or in her case, the first year she stops paying herself a salary, he says.

 

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