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How taxes work in Ontario
PERSONAL VS CORPORATE TAXES
The Ontario Personal Tax system is progressive, meaning that if you make less than $13,000, you pay no taxes~but if you make over $220,000, your tax rate is approximately 53.5% Whaaaaattt?
As a sole proprietor, you pay taxes on the entire amount of profit you make.
Ontario Corporate Tax Rates behave differently. For up to $500,000 in income the tax rate is only 12.5%. Anything over $500,000 is taxed at 26.5%, still only half of the personal rate.
How does tax savings/deferrals work?
By incorporating, your fees/income are paid into the corporation and your deductions are claimed by the corporation. You can defer taxes by NOT withdrawing all amounts deposited in the same year.
Example:
Your income is $200,000 after deductions (cost of goods, etc.) and your living expenses for the year is $60,000. At the personal tax rate, you would be paying $96,380.00 in income taxes.
If you incorporate your business, your income is paid to the corporation and taxed at the Corporate rate of 12.5%. For this, your corporation would be taxed $25,000 (12.5 on $200,000). Then you pay yourself, from the corporation, a total of $60,000 for the year. The tax on this would be $17,790. The total of the two taxes is $42,790. This amounts to $53,590 that remains in your corporation!
These savings can now be used for a variety of things. Income splitting with your family or even yourself, paying yourself in years when your income may be less, pay remuneration to family. You can also create a pension plan within your corporation.
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