How To Minimize Tax Installments in a Corp

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Doug
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How To Minimize Tax Installments in a Corp

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https://www.theglobeandmail.com/globe-i ... le1379548/

From Tim Cestnick:

"The CRA will calculate your March and June instalments based on your tax liability from the second preceding year. Your September and December instalments will be based on last year's tax liability. Your 2010 instalments, for example, will be calculated as follows: March and June will each be calculated as one quarter of your tax liability from 2008, while September and December will each be calculated so as to bring your total tax instalments for 2010 to equal your 2009 tax liability...

Next, you have the option of calculating your quarterly instalments using two other methods if you choose: (1) estimate your current year's taxes, less any tax that is withheld at source, and send the balance to CRA in quarterly instalments, or (2) pay an amount equal to last year's taxes (less any taxes withheld at source) in four quarterly instalments.

Finally, if you're self-employed or pay yourself from a holding company, you may be able to control the timing of your income to eliminate or minimize instalments. You could, for example, pay yourself dividends every second year rather than yearly. This would mean little or no tax every second year. You can then effectively eliminate or minimize tax instalments by basing your instalments on either the current year expected taxes or the prior year actual taxes, whichever year is a low-tax year."
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ghariton
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Re: How To Minimize Tax Installments in a Corp

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Yes, I saw that, but didn't understand the logic. Wouldn't that create alternating years of high and low income? Won't that income de-averaging actually increases my tax bill over all, even though it might help with the timing?

George
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Doug
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Re: How To Minimize Tax Installments in a Corp

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I agree with you. Every other year, you wouldn't be using taking advantage of lower tax brackets. However, it might be useful in the following situation. Assume enough is being taken out of the corp, such that you're in the top tax bracket. Every other year, take out only enough to just get you in the top tax bracket. In the other years, take out all that you need. This way, you can base your tax installments on the year when you take out only enough to get you in the top tax bracket.

With this every other year strategy, there's also the question of the time value of money. Every other year, you're taking out money that you don't need. You could time the excess withdrawal to late in December, so you're effectively taking out money on average 6 months earlier than you otherwise would. You can also put the excess withdrawal in a HISA. But it's possible that you could do better by keeping that excess withdrawal in the corp. That would be balanced by the tax deferral associated with lower installment payments.

There might be situations where an every other year strategy would make sense, but even in those situations, my guess would be that the benefit would be no more than modest.

However, the article does bring attention to the fact that there 3 options, when it comes to paying tax installments. For those whose income is variable, there could be a benefit from alternating between options.
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