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Tax Strategy

Two scenarios: salary versus dividends Add to ...

John Wilson, owner of ABC Accountants, makes $500,000 after expenses, but before tax, in his incorporated practice. He is married to Mary who earns income only from the business.

In the first scenario, Mary receives a salary of $40,000 per year and John $300,000 (before taxes, RRSP deductions, and CPP premiums). The table shows the net result for 2010.*

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In the second scenario, John and Mary each receive $120,000 in dividends; savings are left in the company. As a result, total taxes are lower and savings higher.

SCENARIO ONE

ABC Inc.

John

Mary

Gross Income

$160,000

$300,000

$40,000

Corporate Tax

$21,600

Dividend

Personal Tax

$101,986

$3,946

CPP Premiums

$4,326

$3,614

RRSP Contribution

$22,000

$7,200

Spendable Income

$171,688

$25,240

Corporate Savings

$138,400

Total Taxes Corporate and Personal + CPP

$135,472

27.09%

Total Savings

$167,600

33.52%

Spendable Income

$196,928

39.39%

*Based on 2010 tax rates and CPP premiums. The balance of $160,000 earned is assumed to be retained in the company and tax paid at the small business rate of 13.5% in 2010.

SCENARIO TWO

ABC Inc.

John

Mary

Gross Income

$500,000

Corporate Tax

$67,500

Dividend

$120,000

$120,000

Personal Tax

$20,342

$20,342

CPP Premiums

NONE

NONE

RRSP Contribution

NONE

NONE

Spendable Income

$99,658

$99,658

Corporate Savings

$192,500

Total Taxes Corporate and Personal + CPP

$108,184

21.64%

Total Savings

$192,500

38.50%

Spendable Income

$199,316

39.86%

Source: Nicola Wealth Management, Vancouver

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