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Paying the bills for a contracting company
Expert: Krysta Adamski
I own 22 rental units in Nova Scotia (they are on my wife's income tax). She claims them on her taxes because I make good money. I do all the maintenance on all the buildings but I cannot claim any of my labour cost.
Is it wise for me to open a contracting business and have my wife pay the business (also should the contracting business be limited) since I already make good money.
Krysta Adamski answered:
There are tax issues surrounding your wife claiming the income from properties which you own; however, I will focus on the question you raised.
By starting a contracting business (without using a limited company) and billing your wife for your services, all you are doing is shifting more of the income back to your tax return. If you are already in a higher tax bracket than your wife, this would not make sense from a tax perspective.
If you wanted to incorporate a company for your contracting services, you could bill your wife for your services and leave this income to be taxed in your incorporate company. You would pay tax at the small business corporate tax rate (assuming you are not associated with any other corporations) and reduce your wife's income.
However, when you eventually want to take the money out of the corporation, you will have to pay tax personally on this income either as a salary or a dividend. Also, there are more annual costs involved with a limited company, such as registration, annual corporate tax return filings, etc.
You must carefully weigh the tax savings against the additional costs involved. If your wife if already in a low tax bracket, there would likely not be much benefit in setting up a contracting company (incorporated or not) for you.
Another issue to consider is HST. If you are going to be charging $30,000 or more for your services in any given year, you will be required to register for HST and collect it on all invoices.
About the author
Krysta L. Adamski, CA is a senior tax manager with WBLI Chartered Accountants. She has experience with a wide variety of clients, dealing with matters such as corporate reorganizations, estate and succession planning, international tax matters, the taxation of real property, personal, corporate and trust tax planning and many others.
Krysta began with WBLI in 1997 and has been working with their tax group since 2001. WBLI Chartered Accountants is the largest independent full service accounting firm in Atlantic Canada.