Hello, My wife is self-employed and gets T4. We were filling T2125 for past 2 years. Can we do below to save tax? Her earnings are less than 30k / quarter.
Capital dividends are not on regular earnings so no you can’t do this. I don’t generally recommend incorporation until you are making enough money that you don’t need all of it and are ready to start doing some investing. If she’s making $100k-$120k per year she could incorporate and pay small business tax rates (12% or so depending on the province you are in) and pay out just enough to live on as either payroll or ineligible dividends and invest the rest. This is what I do and can pay myself about $30k in ineligible dividends every year without paying any personal income taxes. My corporate brokerage account from the excess earnings invested over the years also pays me about $10k in eligible dividends every year. If you are not going to leave significant amounts in the company every year then the tax costs are roughly the same as if you didn’t have a company and there is not much point in incorporating and adding an extra layer of filing.
I know it’s almost a cliche answer but you really do need to speak with an accountant face-to-face. I can almost guarantee it will be worth the investment.
Nahh. Wing it.
Thank you this helps. Yes, she is earning 95k and expecting 115k next year. This year on 95k we almost paid 19k as taxes. Hence, I was wondering on above approach. I just have one follow up - How much % ineligible dividend can she pay herself without personal income tax.
Thanks. Yes I will consult for sure. But I dont want to consult without knowing anything. Hence some home work 
From the description provided it seems incorporating may have some paragraph 18(1)(p) limitations regarding expenses, and the corporate rate of income tax would be prohibitive as a personal service corporation / incorporated employee.
Regarding Ineligible Dividends; Your province of residence would make a difference, however, you could earn up to about 32,800 in ineligible dividends without being taxable (assuming that is the only source of income). The caveat here is dividends are not a deduction to the paying corporation. The tax rate for a PSB (depending on the province) is likely to be close to or over 50% of the corporate income.
If your spouse is under 65 it could be that approximately $7,500 of that $19k she paid as “income tax” would have been Canada Pension Plan Contributions. For self employed persons earning between 3,500 and 66,600 CPP contributions account for an additional 12% levy on self employed earnings. This is in addition to the income tax payable on those earnings.
T4 income gets reported on 10100 of the personal T1 tax return, not on form T2125.
If there is a T4, CRA will reassess those tax returns sometime.
Sorry its T4A. I could not edit it after posting.
If it is only one T4A, and has the whole $95,000 on it, CRA might consider her to be an employee.
Better to have a proper in person meeting with a professional accountant with all the detailed documents.
Depends what she is doing. Yes one T4A for all the income would tend to make me think personal services corporation and thus not eligible for the small business deduction but real estate professionals are considered to be self employed and their brokerage house generally issues 1 T4A for all commissions paid. If she’s doing management consulting for 1 company she won’t have access to the small business deduction so there is no point in incorporating.
T4A should be calculated on a T777, not a T2125.
You are clearly and thoroughly confused. You really do require professional assistance.
T4A contract income (fees for services, commissions, etc.) primarily should transfer to schedule T2125, you are incorrect. A T777 is for employment expenses that are deductible as relating to an employer/employee relationship, usually by way of a T2200.
There is absolutely no sense whatsoever in your initial comment, which makes me believe you have little to no experience in regards to taxation, and I would HIGHLY recommend you get yourself a proper accountant (not to say any of us aren’t, but get yourself somebody you can go sit down in an office with physically) before proceeding with any sort of tax planning whatsoever, indefinitely.
I am experienced in tax interpretation, and familiar with CRA’s perspectives on personal services corporations… so let me simplify this for the sake of this thread …
Incorporation is a plausible consideration for you wife. However, it should be noted that this should only really be considered in relation to your total future NET income projections and frequency of business for subsequent periods ahead.
CRA’s has the perspective that if a prior employer/employee relationship was foregone as a result of incorporation, or an employee/employer relationship may exist if not otherwise for the existence of a corporation, then a personal services corporation would exist, and you would be subjected to the provisions that accompany that status as such (attribution at a higher tax bracket, and no access to the small business deduction).
However, there is a concession to the PSC status where the contractor has more than 1 (2 for safety) clients on a fees for services or commission basis, and is a registered GST participant, where you may be allowed access to the small business deduction and operate as a small business corporation.
I have no idea where you got capital dividends from … if you are referring to surplus stripping, don’t even think about it, drop it and move on.
Seems there are plenty of comments in this thread that outline the characteristics and strategies that entail this type of structure, so I will not elaborate any further with regards to tax planning. Best of Luck.
Thank you. This helps a lot. Yes, I messed up in my initial post on T4 (Correct T4A) and Capital Dividend (meant non-eligible dividend which I understood later). She has 2 clients as of now and also providing services though a web application that is invoiced separately. Your comments are very informative. I will surely consult a professional but I wanted to seek basic information before that. Any leads in Greater Toronto area would help.
Happy to help.
I apologize if I sounded harsh, just want to make sure you are getting sound, and accurate information with regards to your ventures. Cheers.