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Tag: incorporated business

  • Is it better to be an employee or self-employed? – MoneySense

    Is it better to be an employee or self-employed? – MoneySense

    What factors determine employment status?

    The Canada Revenue Agency (CRA) uses an important distinction when evaluating a relationship between a worker and a business: the difference is between a contract for “services” and a “contract of service.”

    What is a contract for services?

    A contract for services is a business relationship, like when you hire a contractor to renovate your bathroom or a snow removal company to clear your driveway. Neither the general contractor nor the snowplow driver is your employee. They do not work for you. They provide work for you.

    What is a contract of services?

    If you own a restaurant and hire a cook, or you own a store and hire a cashier, this is a contract of service. You set the shifts and the terms of employment, so it’s a different type of relationship.

    How to determine if you are employed or self employed

    When in doubt about your employment status, the CRA considers six primary factors, Elza.

    1. Control: When the payer dictates when and how work is done, it’s more likely that the person being paid is an employee.
    2. Tools and equipment: An employer is more likely to provide equipment and tools to an employee compared to a self-employed contractor who provides their own.
    3. Subcontracting work or hiring assistants: An employee is unlikely to be permitted to subcontract their work or hire others, whereas a self-employed person can make decisions like this without permission.
    4. Financial risk: Employees typically do not have to pay for expenses to earn their income—or they are reimbursed when they do—whereas a self-employed person is responsible for their own expenses and business profitability.
    5. Responsibility for investment and management: A worker generally does not have to invest their own capital to earn their living, and they don’t typically have a discernible business presence.
    6. Opportunity for profit: An employee’s income may vary depending on their hours, bonus or commissions, but a worker cannot generally control their proceeds and expenses nor incur a loss, like a self-employed person.

    It’s also more likely that you’re an employee if you’re only providing services to a single payer. Someone who is self-employed tends to have multiple clients or customers.

    Should you incorporate if you’re self-employed?

    If you’re self-employed and run a business that has a significant amount of risk, Elza, you may want to consider incorporating. This can limit your liability.

    If you have business partners, incorporation can also be a more efficient way to involve shareholders or raise capital.

    One of the main tax advantages of incorporating is the ability to retain savings within the corporation. You may benefit from a corporate small business tax rate that’s around 40% lower than the top personal tax rate.

    Jason Heath, CFP

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  • Which types of pension income can be split with your spouse in retirement? – MoneySense

    Which types of pension income can be split with your spouse in retirement? – MoneySense

    Here, we’re focusing on splitting pension income, which can include income sources that are not from traditional pensions.

    Can you split your income?

    Here’s a quick table for when you can and when you can’t split your income. Tap the pension income type to keep reading for the why and how.

    Income splitting for DB pensions

    When people think of pensions, they typically think of defined benefit (DB) pension income. DB pensions are calculated based on a formula that generally considers annual income and the number of years as an employee with the employer offering the pension, along with other factors, too. Most DB pensions will not make payments until age 55, but it may be possible to collect a pension earlier.

    DB pension income qualifies to split with your spouse or common-law partner. You can move up to 50% of the income to your spouse on your tax returns. You claim a deduction and they claim an income inclusion. You would only split pension income if it resulted in a net advantage, whether a reduction in combined tax payable or an increase in government benefits.

    Can you split income for SERPs?

    Supplemental executive retirement plans (SERPs) are non-registered plans for executives or other employees. And it bears mentioning that a supplemental DB pension, or top-hat executive pension, with payments that exceed the registered pension plan (RPP) maximums will not qualify for splitting.

    These pensions include a registered portion and an unregistered portion. The registered portion can be split, but the unregistered portion can only be reported on the recipient spouse’s tax return. The split between registered and unregistered will be reported on the pensioner’s government-issued tax slip so should be clear.

    What about RRSPs?

    Most people’s retirement savings are in their registered retirement savings plan (RRSP) account, including defined contribution (DC) pensions. RRSP withdrawals do not qualify for pension income splitting. However, if you convert your RRSP to a registered retirement income fund (RRIF), subsequent withdrawals will qualify starting when the account holder reaches age 65.

    You do not have to convert your RRSP to a RRIF until December 31 of the year you turn 71, with withdrawals beginning at age 72. But the ability to split RRIF withdrawals at 65 may cause someone to consider converting their account by age 64.

    Jason Heath, CFP

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  • RRIF withdrawals: What should seniors with million-dollar portfolios do? – MoneySense

    RRIF withdrawals: What should seniors with million-dollar portfolios do? – MoneySense

    Registered retirement income fund (RRIF) withdrawals are fully taxable and added to your income each year. You can leave a RRIF account to your spouse on a tax-deferred basis. But a large RRIF account owned by a single or widowed senior can be subject to over 50% tax. A RRIF on death is taxed as if the entire account is withdrawn on the accountholder’s date of death.

    What is the minimum RRIF withdrawal?

    Minimum withdrawals are required from a RRIF account each year, and in your 80s, they range from about 7% to 11%. For you, Amy, this would mean minimum RRIF withdrawals of about $200,000 to $300,000 each year. This would likely cause your marginal tax rate to be in the top marginal tax bracket. Sometimes, using up low tax brackets can be advantageous, but you do not have any ability to take additional income at lower rates.

    RRIF withdrawals: Which tax strategy is best?

    Taking extra withdrawals from your RRIF when you are in the top tax bracket is unlikely to be advantageous. Here is an example to reinforce that.

    Say you took an extra $100,000 RRIF withdrawal and the top marginal tax rate in your province was 50%. You would have $50,000 after tax to invest in a taxable account. Now say the money in the taxable account grew at 5% per year for 10 years. It would be worth $81,445.

    By comparison, say you left the $100,000 invested in your RRIF account instead. After 10 years at the same 5% growth rate, it would be worth $162,890. If you withdrew it at the same 50% top marginal tax rate, you would have the same $81,445 after tax as in the first scenario.

    The problem with this example is the two scenarios do not compare apples to apples. The 5% return in the taxable account would be less than 5% after tax. And the same return with the same investments in a tax-sheltered RRIF would be more than 5%. As such, leaving the extra funds in your RRIF account should lead to a better outcome.

    So, in your case, Amy, there is not an easy solution to the tax payable on your RRIF. You can pay a high rate of tax on extra withdrawals during your life, or your estate will pay a high rate on your death. Given you do not need the extra withdrawals for cash flow, you will probably maximize your estate by limiting your withdrawals to the minimum.

    Should you donate your investments to charity?

    You mention donating securities with capital gains. If you have non-registered investments that have grown in value, there are two different tax benefits from making donations.

    Jason Heath, CFP

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