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The New Brunswick Budget, tabled on March 22, contained some good news for business owners and individuals. The previously announced reduction in the provincial general corporate tax rate from 11.5% to 10% on July 1, 2011 and the reduction in the provincial small business tax rate from 5% to 4.5% effective January 1, 2012 have been maintained. The reductions in the personal tax rates effective January 1, 2011, other than the highest rate, have not been repealed. With these reduced rates business owners and individuals may want to consider how they are compensated and how they receive investment income.
COMPENSATION ANALYSIS
The following is an analysis of the taxation of two alternative forms of compensation available to business owners who carry on their business through a New Brunswick corporation.
SALARY
The corporation may pay a salary to the business owner. Salaries are deductible for corporate tax purposes. The following is an analysis of how a salary is taxed in the hands of the business owner taking into account only the basic personal tax credit:
Profit/Salary $100,000 $200,000
Total Personal Tax (28,545) (70,618)
Net After Tax $71,455 $129,382
Average Effective Tax Rate 28.55% 35.31%
DIVIDENDS
The business owner may alternatively choose to not take a salary and instead cause the corporation to pay dividends to the owner. Dividends are not deductible for corporate tax purposes. The following is an analysis of how dividends, paid from a corporation eligible for the small business rate, are taxed in the hands of the corporation and the business owner:
Profit $100,000 $200,000
Corporate Tax (16.0%)* (16,000) (32,000)
Dividend $84,000 $168,000
Personal Tax (10,883) (35,824)
Net After Tax $73,117 $132,176
Average Effective Tax Rate 26.88% 33.91%
* Rate to be reduced to 15.5% effective for tax years subsequent to January 1, 2012.
The top marginal rate for salaries in New Brunswick is 43.3%. The top combined marginal corporate and personal rate for dividends of a small business corporation is 41.90%. This rate will be reduced to approximately 41.55% in 2012 as a result of the reduction in the small business corporate tax rate in New Brunswick.
This analysis shows that given the low small business rate and the reduced personal tax rate on dividends a business owner may be better off opting to receive dividends rather than a salary. Income splitting opportunities with lower income family members may also be available using dividends.
Consideration must also be given to the business owners retirement needs. A salary creates eligible RRSP contribution room while dividends do not and a salary creates eligibility for the Canada Pension Plan, and the requirement to pay the annual premium, while dividends do not.
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