Life Train | To merge or not?

Elizabeth enjoys a stable and well-paid job, but she wants new challenges and more flexibility in her lifestyle. She wants to go it alone and is wondering if it should be incorporated for tax reasons.


Martin LittartMartin Littart
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Application

Elizabeth *, 36, is a Certified Public Accountant (CPA) who works for a financial institution. His common-law partner, Francois, is also an auditor at a financial institution and intends to remain in his position.

The couple has two children and a frugal lifestyle. “We have places in the childcare center, only one used car was bought and paid for in full, and we are controlling our expenses,” Elizabeth explains.

Both spouses pay half of the household’s expenses, except for the apartment that belongs to Elizabeth. It bears all costs. They have a will, but they do not have a cohabitation contract. The couple also wonders about splitting the expenses, because Elizabeth has higher income and higher net worths than François, who financed her return to school.

By setting alone, Elizabeth wonders whether it would be beneficial to combine a reduction in her tax bill and an increase in her family’s allowances. She also wants to achieve financial independence and aims to retire after 10 or 15 years.

“If I incorporate, I would like to leave as much money as possible in my business so that I can withdraw a small amount annually once I retire. Does my plan make sense? What is the fee to keep the business open?”

Numbers

Annual family expenses
$ 31,000 assumed by Elizabeth
$ 18,000 assumed by Francois
$ 5,000 for non-COVID-19 travel

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wages
Elizabeth: $ 90,000
Francois: $ 70,000

Elizabeth’s origins
Apartment value $ 60,000 remaining: $ 300,000
Real price: $ 115,000
TOTAL: $ 91,000
Unrecorded savings: $ 19,500
REEE Part Capital: $ 12,500
United States Retirement Plan: $ 50,000
Employer defined pension plan: $ 120,000

Francis Origins
Irrigation: $ 90,000
TOTAL: $ 91,000
Unrecorded savings: $ 69,500
REEE Part Capital: $ 12,500
Employer defined pension plan: $ 40,000

Business / individual tax rates

For a long time, the self-employed have been merging to take advantage of a lower corporate tax rate than the individual rate and to take advantage of the ability to pay themselves with low tax profits. But the rules have changed in recent years. To obtain the reduced tax rate granted to small businesses at the county level, it is necessary to have access to 5,500 hours paid by their employees for the tax year.

“On her own, she will not have the right to do so, so her corporate tax rate will be 20.50%, and we must take into account the significant increase in the profit tax rates,” explains Sandy LaChapelle, the financial planner at the head of La Chapelle Financial. smartes serving a number of entrepreneurs.

Advantages of incorporation

But Elizabeth’s case is special, as her family only has $ 54,000 in annual expenses. “So the family can use the company to save money in order to defer payable tax,” M.I am La Chapelle.

Assuming that Elizabeth would earn $ 60,000 in net income on her account, the couple’s most beneficial solution would be to go toward integrating and integrating their finances in order to create a joint tax plan.

Photo by Marco Campanuzzi, press

Sandy LaChapelle, financial planner at the helm of LaChapelle Smart Finance

M. Francois’s income can pay for nearly all family expenses.I am La Chapelle. Thus most of Elizabeth’s income could be maintained in the company and she could pay herself $ 10,000 in dividends to meet the rest of the needs without having to pay taxes. ”

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The advantage is also tangible along with family suits. “For example, with $ 60,000 in self-employment income and François’s salary, a Canadian child’s benefit is $ 430 a month, but if Elizabeth only had $ 10,000 in earnings, the allowance would be more than $ 700.”I am La Chapelle.

The remaining funds will be invested in the business in the same way as Elizabeth would be invested in exchange for her personal funds, taking into account her risk tolerance, investment horizon and need for liquidity.

Sandy LaChapelle presented her forecast with a moderate growth profile, with assumptions of yield from the Institut québécois de planinancière financier, which gives a yield of around 4%. calendar? The couple can retire at the age of 50 and their expected net worth is about 4 million at the age of 75. If Elizabeth is not incorporated, it is better that it is 3 million. If the couple doesn’t combine their finances, and Elizabeth gets about $ 35,000 net worth a year from her business, which earns $ 60,000, the best solution isn’t that obvious. “With the precise revenues of the company, we will have to consider different compensation scenarios,” says Sandy LaChapelle.

Joint life contract

If spouses combine their financial resources to improve tax planning, then François should be protected.

“The spouses must enter into a cohabitation contract, because the family will live on François’s income,” says Sandy LaChapelle. “The amount accumulated in Elizabeth’s business should be considered an asset of the couple.” To carry out this work, it will be necessary to seek the experience of a notary. ”

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Lower costs associated with work

To incorporate, you have to plan for a fee of around $ 1,500, says Sandy LaChapelle. Next, you must produce the financial statements and income statement for the company each year.

“You have to budget $ 2,000 or $ 3,000, but since Elizabeth is an accountant, she can do the work on her own.”

Reality test

The Sandy LaChapel scenarios were produced with $ 60,000 net business income. But will they be there? “If it’s earning a lot less, it’s quite likely the incorporation is not financially relevant,” she says. To make an informed decision you need to have a good idea of ​​how much you will be earning on its own. She can also start as a freelancer and consolidate when her business results greatly exceed her needs. ”

* Although the case illustrated in this section is real, the first names used are fake.

Are you planning a project that requires the judicious use of your money? Do you have financial problems? Submit your case to the Train de vie team.

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