Frequently Asked Questions

I am looking at buying a car and the salesman told me I could buy it through my company and get a write-off?

The income tax rules for company vehicles are extremely complicated and onerous. Purchasing a company vehicle can work if you have other vehicle(s) that you own personally and you can say that the company vehicle is used 100% for business purposes (and justify this with a log). However, if not, you can be assessed on your personal income tax for personal use of the company car. This can amount to 24% per annum of the original cost of the vehicle so it is significant!

To avoid this issue, I usually recommend buying the vehicle personally and charging the company for business use.

There are some tax advantages to leasing equipment, but the decision to buy or lease should be based on the best deal available. Tax implications are secondary - you do not want to pay out more money to save tax! There are web sites that will help you with buy/lease decisions. You can find one of these in the links section of this website.

Regular taxpayers are eligible for CPP benefits at 60. There are always special circumstances but my general advice is that the earlier you start collecting on this, the better. Calculations show that after age 76, the person who waits until they are 65 will accumulate more than the person who starts collecting early. However, this does not take into account the fact that the person who starts collecting at 65 may have to pay CPP for another 5 years! Please refer to the Retirement Income Calculator in the links section to estimate your CPP retirement income.

The general rule is that you should keep your records back seven years. However, it also depends on when you filed your taxes and received your notice of assessment. As a practical matter, it is often useful to have records that go back farther than seven years, for example, if you want to substantiate the purchase price of an investment. Although I have never seen CRA go back any more than three or four years, if in doubt, keep the records!

The obvious answer is "how much are they worth?" On audit, CRA will look at what you would pay another employee to do the same job. Paying your twelve-year-old son $30,000 for consulting services would probably be unreasonable, but perhaps he is a computer guru. Paying your spouse $30,000 would probably be acceptable, depending on his or her background, credentials, and duties.

The courts have also ruled that proper deductions, employee remittances, and reporting are necessary to support any salary payments.

This will depend to a large extent on how much income is taken personally and the net income of the company. Personally, at lower income levels (under $35K), there is no tax on dividends (assuming no other income). The company will pay its basic tax (currently 16.12% for active business income) - however, since the minimum personal tax rate on salary (in excess of basic deductions) is 25%, overall this is a pretty good savings.

The other benefit is that there is no CPP on dividends. CPP is becoming increasingly expensive - about 10% of salary including the employer portion. Some people like the idea of paying CPP, knowing that they will get it back in future. Again refer to the Retirement Income Calculator if you want to find out the effects of opting out of CPP.

The downside of dividends is that they are not earned income for RRSP purposes and therefore do not build up RRSP room. However, overall, I see more owner/managers opting for dividends to improve their current cash flow.