A TIP IF YOU HAVE A CORPORATION AND NO EMPLOYMENT INCOME
If you report no employment income (including income from being a director of a corporation), but you have a corporation that pays you either dividends or as an independent contractor*, here is a small planning tip.
The “Canada Employment Credit” in subsection 118(10) of the Income Tax Act gives you a federal tax credit of 15% against your first $1,161 of employment income (the amount is indexed to inflation every year). This year, it’s worth $174.
If you arrange to take a small amount of employment income from your corporation (say $1,200), perhaps as a director’s fee (which is reported as income from an “office or employment”), you can benefit from this credit. You’ll still pay the balance of the federal tax on the income, and provincial tax, but your effective tax rate on that $1,200 will be 15 percentage points lower because of this credit.
* A caution if you are getting income from
your corporation as self-employment income
(i.e., as an independent contractor): you need
to check carefully, with professional advice,
that you are reporting this income correctly.
The Canada Revenue Agency often takes the
position that a company owner/manager who
earns income from the company for work
done is an employee. If this happens, the
CRA will assess the company penalties for
failing to withhold income tax from your
pay, as well as Canada Pension Plan employer
and employee contributions. There are many
Court cases holding that an owner/manager was
an independent contractor to the corporation,
but there are just as many going the other
way. Each case must be carefully examined
to consider the facts of the actual working
relationship between you and the company.
