Mrs. Edwards presently operates a retailing proprietorship with a December 31 fiscal year-end. She expects net income for tax purposes of $210,000 from the business. Since the business currently requires considerable amounts of working capital, she can only afford to withdraw $50,000 annually to meet her family's needs.
She lives in a province where the provincial corporate tax rate is 7% of federal taxable income. She is married and has two children (ages 18 and 19) who will start university soon. Her husband, who looks after their home, has no income and no interest in the business.
Mrs. Edwards has federal personal credits of $2,400, provincial personal tax credits of $1,600 and has no other income. She is contemplating the incorporation of her business. If she does so, she has been advised that if she makes all withdrawals from the business in the form of $50,000 salary, she will end up with enough after-tax to meet her family's needs. Although she is not considering it at present, she expects to pay dividends at a time when her other taxable income is at about the same level as it is currently.
REQUIRED
(A) Compare the total tax that Mrs. Edwards would pay in 2012 on the $210,000 earned personally with the total tax that would be paid if she incorporated her business and only took out a salary of $50,000. Ignore any Canada Pension Plan premiums payable on the income.
(B) How much personal tax does Mrs. Edwards defer each year by keeping the remaining after-tax retained earnings in her company?
(C) Compare the total income tax incurred by using a corporation to earn income with the personal tax incurred when the income is earned directly by Mrs. Edwards. Consider the corporate tax plus the personal tax on the salary and the dividend paid out of after-tax retained earnings. What is the absolute income tax cost or savings for Mrs. Edwards if she incorporates?
(D) Assuming Mrs. Edwards chooses the incorporated form of business, what additional tax savings could be achieved by income splitting with her family members?