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Using corporation for income not always a tax advantage

While there is a benefit to using a corporation for active income in some circumstances, it is important to realize that this does not result in an absolute tax savings, Toronto tax litigation lawyer David J. Rotfleisch tells Newstalk 1010’s The Night Side.

“The way our system works is the concept of earning income through a corporation is supposed to be the same as if you earn the income personally. It’s called integration. So the idea is, if you earn $100 personally or if you earn it through a corporation, pay tax on the corporation and take the money out of the corporation, you will end up with the same after-tax income either way,” Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation, tells listeners.

The first stage of taxation is paid in the corporation itself, at a low rate of approximately 25 per cent, as opposed to 45 per cent for directly earning the money, he explains. As such, taxpayers can only take advantage of this rate if they are able to leave the money in the corporation forever.

“If you take the income out as dividends, you pay the remaining 20 per cent,” he says.

There is no advantage to the approach if you are using it for passive income such as investments, which are taxed at the personal rate.

During the show, Rotfleisch also responded to questions from the public via call, email and text, with one caller asking what his brother should do as he hasn’t filed taxes in 15 years, but wanted to declare bankruptcy.

“This is something we deal with literally on a daily basis and it’s the Voluntary Disclosures Program,” says Rotfleisch.

If the brother is in Canada, he explains, he would need to file a voluntary disclosure to report his estimated income and HST for those tax years. Once he is assessed by the Canada Revenue Agency (CRA), then the brother can go bankrupt, which will wipe out the debt. However, if it is a large debt, says Rotfleisch, the brother may have to make payments to the CRA.

This, he says, is the only approach. If the brother goes bankrupt and then the CRA pursues him for unfiled tax returns, the debts may still be collectable.

Another listener asked whether there is a limit to the amount you can make selling items online, via eBay for example, before you are required to pay taxes on the income.

Unless you are dabbling as part of a hobby, any business you are conducting — whether on the Internet through eBay or in the garage sale business — requires you to report that income, Rotfleisch explains.

And, another listener asked Rotfleisch how to rectify a situation where their former partner incorrectly filed taxes as common law in order to get tax breaks, even though the caller filed as single. The pair was subsequently hit with thousands in fines.

“That’s a little more complicated. You’ve got to amend the returns correctly and that may or may not involve a voluntary disclosure. It certainly will involve filing amended returns, it may involve some sort of fighting with CRA and fighting with the ex.

“Its very important to negotiate who is going to claim the tax credits and child tax benefits,” Rotfleisch tells listeners.

To Read More David Rotfleisch Posts Click Here
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