Corporate Income Tax Services

 

Small business owners are always trying to save a few dollars, however, be careful where you try to save those dollars!

One of the greatest myths in the small business community is that a CA or large accounting firm must complete your Corporate Tax Return and Financial Statements each year; nothing could be further from the truth!

A Ledgers Professional has the training, skills, support and infrastructure to complete your financial statements and tax returns professionally and in a timely manner, usually at a FRACTION of the cost of the large firms.

Why spend your hard earned dollars unnecessarily?

At Ledgers Canada, we provide our Network Members with the tools and training to assist you in making your business better. Why rely on an individual that considers themselves to be a bookkeeper because they know how to use an accounting software application, when you can trust your books and financial information to a Professional with the education and skills necessary to help you succeed?

 

Personal Services Corporations - Look out for CRA!

Ledgers Corporate Tax Services


Firstly, we should define a Personal Services Corporation:

Under CRA’s rules, your Corporation would be considered a Personal Services Corporation if you provide services on behalf of your Corporation to another Company and you would reasonably be considered an employee or officer of the company to which you provide the services.

If your Corporation however employs more than five full-time employees or it provides services to an associated Corporation, it will generally not be considered a Personal Services Corporation.

A Personal Services Business is not eligible for the small business tax deduction (lower tax rate on the first $500,000 in earnings) and the expenses that can be claimed for tax purposes are severely restricted.

In general, a personal services business’ deductible expenses are restricted to salary and wages. No deduction is available for items such as Advertising, Transportation and Training.

These rules were introduced to prevent employees from terminating their employment with a company and then working for that same company through their own corporation to obtain tax advantages.

Now, the Government has approved legislation that is virtually going to eliminate the advantages associated with this type of Corporation.

Effective with tax years beginning after October 31st, 2011 income from Personal Services Corporations will be taxed at a Federal Rate of 28% (up from 15%) plus the applicable Provincial Tax Rate. If for example your year-end is December 31st, this tax hike applies to your year that ended on December 31st, 2012.


Example: The effect of this change on an Alberta Personal Services Corporation


Assume the Corporation has a Net (before tax) Profit of $10,000.

Before this change, the Corporation would pay $1,500 in Federal Tax and another $1,000 in Alberta Provincial Tax. Leaving net earnings of $7,500.

Now, as a result of this change, the Corporation would pay $2,800 in Federal Tax and $1,000 in Alberta Tax resulting in net earnings of $6,200.

The net result: Your Corporation pays an additional $1,300 in Income Taxes.

If the same $10,000 in income was earned by you personally in Alberta and you paid tax at the highest tax rate (39%) you would have net earnings of $6,100 a difference of only $100.
When you factor in the cost of Corporate Tax Preparation Services etc., there is virtually no advantage any longer to have a Personal Services Corporation.

What should you do next?

Firstly, talk to your accounting professional and determine if you do in fact have a Personal Services Corporation.

If it is decided that you do, you and your accountant will have to determine if there is any point in maintaining the Corporation or if you would be better off winding it up.

There are still some minor tax advantages depending upon what province you reside in.

Also, if you have significant investments held within the Corporation, you may want to keep the Corporation active to defer tax on the Retained Earnings until you withdraw those earnings at some point in the future.