Sole proprietorship and tax estimates?
 

Is there an easy way to get rough idea about the tax % with a sole proprietorship setup (in BC)?
Looking at a single US client - so for example 40 hours per week and US$50/hour.
Similar to a limited company contractor in UK drawing the main income from dividends with minimum salary.

Re: Sole proprietorship and tax estimates?
 

When I started working on that basis, in the 1980s. one could reduce the tax to almost zero by taking on suitable habits; multiple cars, drinking a lot, eating only in restaurants. I found I couldn't eat and drink enough so I paid bars to collect unused receipts for me. I was paid in dividends and shareholder loans. Happy days.

When I last worked on that basis, August 2021, all the tax advantages had been eliminated. The tax was the same as being an employee (say 40%) and the only benefit was deferring the taxes.

Re: Sole proprietorship and tax estimates?
 

I am working on this basis currently and treat it like a business - it helps that i have a business site and business cards etc. I have a Visa business card and things like cell phone, petrol, and IT related expenses, etc, all go on that card.

Come tax time I can write off a fair bit. This will be my first filing year on this basis so we will see how it goes.

Re: Sole proprietorship and tax estimates?
 

Stealing isn’t ok but not surprised.

Re: Sole proprietorship and tax estimates?
 

Hi, if you download Studio Tax you can enter your anticipated income and expenses under a tax return for 2021 although I guess you're talking about tax year 2022. That would give a rough estimate of what to expect - just don't file it to CRA! You can play around with the numbers to see what effect various scenarios give you.

Re: Sole proprietorship and tax estimates?
 

2021 would be just fine. I am mainly trying to figure out if one is able to do a limited company setup and draw most of the income as dividends. this is common with UK contractors operating outside IR35.
Or if CRA is strict with this sort of thing... and you're supposed to do sole proprietorship, in which case you pretty much pay tax like you're employed.

Re: Sole proprietorship and tax estimates?
 

That is how I operated initially, the corporation paid dividends to me, to my wife, to the corporate mascot dog and so on. We always had "business" cars and "recreation" cars (typically just a plate with no physical vehicle) as I was never going to keep adequate log books to be able to claim part of a vehicle.

That is how it is now. All the fun allowances are gone. All you get is deferral; quarterly payments are requested but the CRA will live with annual ones.

Re: Sole proprietorship and tax estimates?
 

Thanks! Do you know when this changed in Canada? if you could point me to any documentation, that would be great. In UK, there are lot of contractors still operating outside IR35 despite the gov changes last year (in which they made a mess of it).

Re: Sole proprietorship and tax estimates?
 

The CRA tightened the rules progressively. If you want to know when each tax avoidance scheme was eliminated you'll have to speak to an accountant. In that case though you may as well ask which ones are still allowed. From memory, use of the car went about 15 years ago, paying oneself by dividends 10 years ago and shareholder loans spanning year end 5 years ago. You can still pay a salary to a spouse if you have one in a lower tax bracket.

All my subcontractors are incorporated but that's to avoid the risk of them being deemed employees.

Re: Sole proprietorship and tax estimates?
 

I see. Is personal services business an option to consider in this mix? my US client wouldn't know much as they don't have any contractors in Canada. should be easy for them too without getting another party involved in-between and paying them a cut.

Re: Sole proprietorship and tax estimates?
 

I don't understand the point of the personal services corporation as regards tax. The crux of tax avoidance through incorporation is the ability to pretend that there are more clients and more workers than there really are. Using a personal corporation seems like an admission that there's only one worker.

Re: Sole proprietorship and tax estimates?
 

Understood! So, I should incorporate and bill the client in this format. But expect the CRA to tax me in full.
For my estimate on whether this is worth it (why I started this thread), I assume I put the whole income under self employment below? and this is the worst case scenario in terms of tax (or the maximum i could end up paying)
2021 Income Tax Calculator British Columbia (wealthsimple.com)

Summary
If you make $134,000 a year living in British Columbia, you will be taxed $40,123. That means your net pay will be $93,877 per year, or $7,823 per month. Your average tax rate is 29.94% and your marginal tax rate is 40.70%.

Re: Sole proprietorship and tax estimates?
 

I don't know that you should incorporate. Arguments against include:

- it's hard to wind the corporation up. I have many of them because, from time-to-time, there was a tax holiday for new businesses so I started a new business. Paperwork has to be filed for each of them every year.
- the tax advantages are likely to be minimal.
- the usual reason, wanting to maintain distance from the client, doesn't apply when the client is in another country.

I think the ideal course is to find and accountant and ask if there's a way, through incorporation or some other approach, to reduce the tax on $134,000 to less than $40,000. If not, then skip the corporate set up and just declare self-employment income.