Nancy Ball presently operates a retailing proprietorship with a December 31, year-end and makes $150,000 of net income for tax purposes annually. She is thinking of incorporating her business and has asked for your advice. She lives in a province where the provincial corporate tax rate is 5% of this type of federal taxable income. She has $2,100 of federal personal tax credits, $1,400 of provincial personal tax credits, and no other income.
REQUIRED
(A) Estimate the personal taxes that Nancy would pay currently on $150,000 of business income compared with the amount of corporate and personal taxes that would be paid if she incorporated her business and only took out a salary of $50,000? Ignore all payroll taxes (e.g., Canada Pension Plan premiums) when making your estimates.
(B) Based on your calculations in (A), estimate the amount of personal tax that Nancy defers by keeping the remaining after-tax retained earnings in her company this year? [Hint: compute the additional personal tax that she would pay on a dividend equal to the corporation's after-tax retained earnings.]