Quote:
Originally Posted by psyang
This has always been the case - my understanding is that the CRA is simply becoming much more hardline on how they determine whether someone is really a contractor or an employee.
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Not quite... Previously, people would do this and attempt to take the small business deduction so they'd have a marginal rate of ~13% until dividend payout. If it was determined you were really an employee hiding behind a corporation, you were a PSB (as discussed), but the practical impact of that was that you didn't get the small business deduction and instead paid tax at the regular corporate rate.
It wasn't a death knell, really. In fact you were still in a pretty good spot, receiving a 13% tax deferral on any reinvested net income for basically no tradeoff. Since 2006 or so, the corporate rate has been pretty well integrated so the ultimate tax disadvantage is negligible and more than offset by the deferral advantage. You paid about 26% at the corporate level, and once dividends were paid out the combined rate ended up being about the same as what you would have paid had you earned the income directly.
No more. Now if you're a personal services business, your corporation doesn't get the general rate reduction. So once you've taken dividends out, you end up paying well in excess of 50% income tax, which is absurd.
The way to deal with this if you're stuck in this situation is to ensure that the corporation itself earns no income - to the extent it has taxable income for the year that amount should be paid out as salary / bonus. Which provides no tax advantage because it's the same as if you were drawing salary directly. (EDIT: Beaten to it by Darklord.)
The problem is, usually you're getting reassessed for multiple years at a time and you can't retroactively un-pay a dividend. So if you're operating under this structure you are risking a very large penalty, and as a result of the change it would not be surprising if this became an audit priority in AB at some point.
The change was I believe a 2011 change. This thread's from 2007 so I brought it up in case people were relying on the old information and didn't realize this.