September 26, 2023
All Tax Articles

If you report no employment income (including income from being a director of a corporation), but you have a corporation that pays you either dividends or as an independent contractor*, here is a small planning tip.

The “Canada Employment Credit” in subsection 118(10) of the Income Tax Act gives you a federal tax credit of 15% against your first $1,368 of employment income (the amount is indexed to inflation every year). For 2023, this is worth $205. If you arrange to take a small amount of employment income from your corporation (say $1,300), perhaps as a director’s fee (which is reported as income from an “office or employment”), you can benefit from this credit. You’ll still pay the balance of the federal tax on the income, and provincial tax, but your effective tax rate on that $1,300 will be 15 percentage points lower because of this credit.

* A caution if you are getting income from your corporation as self-employment income (i.e., as an independent contractor), you need to check carefully, with professional advice, that you are reporting this income correctly. The Canada Revenue Agency often takes the position that a company owner/manager who earns income from the company for work done is an employee. If this happens, the CRA will assess the company penalties for failing to withhold income tax from your pay, as well as Canada Pension Plan employer and employee contributions. There are quite a few Court cases holding that an owner/manager was an independent contractor to the corporation, but there are also quite a few going the other way. Each case must be carefully examined to consider the facts of the actual working relationship between you and the company.

This letter summarizes recent tax developments and tax planning opportunities from a third-party affiliate; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this blog post, which are appropriate to your own specific requirements. Please feel free to get in touch with Lee & Sharpe to discuss anything detailed above, we would be pleased to help.
Douglas K. DeBeck

Hello, my name is Douglas K. DeBeck, I am a partner at Lee & Sharpe.

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