Canadian Tax on Dividends

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webcite_99
Posts: 46
Joined: Fri Feb 18, 2005 8:45 pm

Canadian Tax on Dividends

Post by webcite_99 »

I am a US citizen and resident who may be moving to Montreal with dual citizen spouse. I am currently a minority shareholder of a US based S Corp, a majority "shareholder" of an LLC and an independent consultant/contractor (i.e. a 1099). I have been led to believe that if I move, that my best tax strategy would be to form a Canadian corportation and conduct all of my business through it (perhaps by charging a consulting fee to my S Corp and LLC or transfering the shares to the new Can corp and by having the Can corp be the consultant rather than me personally) and then cut myself a dividend rather than take a salary. I have been informed that this would trigger a total Canadian tax of 23% rather than being taxed at the higher income tax level (i.e. approx 50%).

Question 1: is this true that I could reduce my Can taxes to roughly half of what I otherwise would pay in Can income tax by taking the money in the form of a dividend?

Question 2: What would my tax credit situation look like (assume I make a total of $150,000 profit in the Can corp and take it all as a dividend thus leaving me zero income -- if this is even possible)?

Question 3: How much total tax would I pay to both the US and Can govt assuming this was my only revenue source (I am confused about how the credits work and if you max out on credits from the US etc.)

Question 4: Am I missing something or is there a better strategy that the above?

Thanks.
Carson
Posts: 182
Joined: Wed Oct 27, 2004 1:00 pm
Location: Toronto

Re: Canadian Tax on Dividends

Post by Carson »

webcite_99 wrote:I am a US citizen and resident who may be moving to Montreal with dual citizen spouse. I am currently a minority shareholder of a US based S Corp, a majority "shareholder" of an LLC and an independent consultant/contractor (i.e. a 1099). I have been led to believe that if I move, that my best tax strategy would be to form a Canadian corportation and conduct all of my business through it (perhaps by charging a consulting fee to my S Corp and LLC or transfering the shares to the new Can corp and by having the Can corp be the consultant rather than me personally) and then cut myself a dividend rather than take a salary. I have been informed that this would trigger a total Canadian tax of 23% rather than being taxed at the higher income tax level (i.e. approx 50%).

Question 1: is this true that I could reduce my Can taxes to roughly half of what I otherwise would pay in Can income tax by taking the money in the form of a dividend?

Question 2: What would my tax credit situation look like (assume I make a total of $150,000 profit in the Can corp and take it all as a dividend thus leaving me zero income -- if this is even possible)?

Question 3: How much total tax would I pay to both the US and Can govt assuming this was my only revenue source (I am confused about how the credits work and if you max out on credits from the US etc.)

Question 4: Am I missing something or is there a better strategy that the above?

Thanks.
1. Nope. If you take the money out of the Canadian corporation, you will pay about the same as if you earned the income personally. That is the concept of "integration" in the Canadian tax system. Remember, you will pay corporate tax on the net income, then personal tax on the dividend you receive. The combined total tax should be the same as if you earned it personally.

2. Zero income? Not following you. Dividends paid are not deductible to the corporation.

3. & 4. Your situation is complicated by your participation in the S corp and especially the LLC. I can't give you a simple answer.

I strongly suggest you meet with a knowledgeable cross border Canadian accountant, such as the host of this site to work out the implications of your specific facts. It won't be cheap, but it will be worth it.
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