In a prior post, I discussed why using up the lower personal tax brackets every year is good tax planning. In this post, I plan to further discuss the tax benefits of increasing shareholders remuneration from the CCPC.
Tax Benefits of Increasing Shareholders Remuneration From The CCPC
Since the current Liberal Government has come into power back in 2015, there has been many changes made to the taxation of CCPC. The biggest tax change is the maximum $50,000 of
aggregate investment income (“AII”) that a CCPC can earn before the $500,000 small business deduction limit (“SBD”) is impacted.
Once the maximum $50,000 AII is exceeded, the small business deduction limited is reduced $5 for every $1 additional investment income. Hence, once investment income reaches $150,000, the CCPC will not be entitled to the small business deduction the following year. Consequently, all corporate profit will be taxed at the current “big” rate of 27% (for BC resident corporations). Note that current year AII impacts the available SBD limit the following year only. The CCPC starts with the entire $500,000 SBD every year and this is reduced accordingly by the excess AII from the prior year. Exceeding the AII limit one year does not leave the CCPC with the big rate continuously into the future.
On one hand, the 27% corporate tax rate is still a good deal for CCPC if one considers that the highest personal tax bracket is 53.5% and this starts at $227,092 of employment income. On $200,000 employment income, the total incomes taxes is approximately $64K or 32% average tax rate plus the employer and employee portion of the CPP premiums combining for $7000.
On the other hand, there is disintegration of investment income earned in a corporation. (This is a fancy way of saying investment incomes earned in a corporation is taxed higher than investment
income earned directly personally.) The refundable tax regime further penalizes corporate investment income by forcing the CCPC to pay taxes on investment income upfront. The introduction of ERDTOH and NERDTOH made dividend distribution that gave access to the refundable taxes from CRA more complex. Finally, the personal tax rates on ineligible dividends have increased slowly annually to a substantial amount between 2015 to 2022.
So where does this leave the CCPC shareholder with the amount and type of remuneration when tax planning?
When I am confronted with this question from my client, I start with payroll remuneration of $162,000 or thereabout. This figure gives the shareholder/manager the maximum RRSP deduction
amount or $29210. It also greatly exceeds the CPP pensionable ceiling amount of $64,900. The RRSP allows tax sheltering and reduces the personal tax burden. The corporate taxes are reduced
especially if the CCPC has no SBD room. CPP contributions are being made. Dividends can be issued as well to get back some or all of the refundable taxes owing to the CRA due to investment
income. Best of all, lower tax brackets are being used up personally. Remunerations to the shareholder is not minimized but tax efficient and sustainable over the long run.
At the corporate level, the retained earnings being accumulated is less than otherwise as funds are being accumulated personally and in the RRSP account instead. The AII being earned each year can be managed and massive grind down of the SBD can be avoided annually.
A relatively young shareholder will greatly benefit from the tax shelter benefits of the RRSP. The introduction of the FHSA in 2023 will increase the tax shelter benefits. Note that the corporation
itself will be accumulating retained earnings for investment as well.
This is my warm and fuzzy answer to the remuneration question right now.
Vancouver Corporate Tax Planning Services – Mew & Company
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