With the deadline for personal income tax behind us, it’s a good time to learn how corporate income tax might save you a substantial sum of money in taxes next year.

The personal income tax rates in Ontario are in four bands:

  1. Up to $36,379 in income is taxed at 24.4 per cent;

  2. Income from $36,378 to $72,756 is taxed ranging from 31.15 to 39.41 per cent;

  3. Income from $72,756 to $118,285 is taxed at 43.41 per cent and finally any income over $118,285 is taxed at 46.41 per cent. If you are fortunate enough to be in the highest tax bracket and are self-employed you may find incorporating will lead to a much lower tax bill.

The Income Tax Act, in conjunction with the Ontario government, taxes Canadian-Controlled Private Corporations (which most small incorporated businesses fall into) at a rate of 18.62 per cent for the first $300,000 of active business income: This threshold will rise to $400,000 in 2007. If you are incorporated, growing your business and not taking all of the income out of the corporation in the way of salary, bonus or dividends, it makes sense to incorporate, retain profits in the corporation and save on higher personal tax. This is not illegal, it is just good tax planning.


And it’s not “tax evasion,” fraud by the tax payer which can result in criminal charges and jail time. An accountant and/or specialized tax lawyer can assist in obtaining the most favourable tax bill at the end of the year.

Jeffrey D. Cowan, B.A., B.Comm, LL.B., M.B.A., is the Principal of Cowan & Taylor, Barristers & Solicitors which practises in the areas of business and real estate law. Cowan appears in Your Money every other week. E-mail jeff@cowanandtaylor.comor call 416-363-5046 with questions for future columns. The information contained in this article should not be relied upon as legal advice.

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