The short answer.
- Incorporate and leave money in the company. The gap between the small business rate and top personal rates is the biggest lever most owners have.
- Pay yourself deliberately. Choose salary, dividends and pension contributions on purpose each year, not by habit.
- Watch passive income. More than $50,000 of investment income in the company can cost you the small business rate.
- Plan the exit and the estate. The lifetime capital gains exemption, an estate freeze, the capital dividend account and corporate insurance decide how much you keep at the end.
Incorporate and defer personal tax.
Active business income up to $500,000 is taxed at roughly 9% to 12% in a Canadian-controlled private corporation, depending on the province. Personal top rates are 47% to 54%. Money you do not need personally can stay in the company and compound on a larger base.
See current figures in corporate tax rates in Canada.
Salary, dividends and pensions.
Salary is deductible to the company and builds RRSP room. Dividends avoid CPP but create no room. Income splitting with family through dividends is limited by the tax on split income (TOSI) unless an exception applies, such as a spouse when the owner is 65 or older.
For owners over 40 on salary, an Individual Pension Plan often allows larger deductible contributions than an RRSP, and a Retirement Compensation Arrangement can suit very high earners.
Control passive income in the corporation.
Once adjusted aggregate investment income passes $50,000, the small business limit shrinks by $5 for every $1, disappearing at $150,000. Investing for deferred capital gains, using a holding company carefully, and corporate-owned permanent insurance are common ways to manage it.
Details are in how to reduce passive income tax.
Corporate insurance and the CDA.
Premiums are usually not deductible, but they are paid with low-taxed corporate dollars. Growth inside an exempt policy is generally sheltered, and the death benefit above the policy's adjusted cost basis is credited to the capital dividend account so it can go to your family tax-free.
Read is corporate life insurance tax deductible? and the CDA guide. This is not right for every company; we compare it with simply investing.
The exit and the estate.
Selling qualifying small business corporation shares can shelter about $1.25 million of gain per person with the lifetime capital gains exemption. Family trusts can multiply it across family members when planned years ahead.
An estate freeze caps the tax at death, and funding that tax with insurance avoids forced sales. See estate planning for business owners.
Frequently asked questions.
How can a business owner legally pay less tax in Canada?
The main legal levers are incorporating and keeping surplus in the company, choosing the right salary and dividend mix, using an Individual Pension Plan, managing passive investment income, using corporate-owned insurance and the capital dividend account, and planning the exit and estate with the lifetime capital gains exemption and an estate freeze.
What is the best tax strategy for high-income earners in Canada?
For incorporated high earners, the biggest savings usually come from deferring personal tax by leaving money in the corporation, then deciding how that surplus is invested and eventually paid out. The best mix depends on age, cash needs and estate goals.
Can I pay my spouse or children dividends to save tax?
Often not without tax at the top rate, because of the tax on split income (TOSI) rules. Exceptions exist, for example for a spouse once the business owner is 65, or for family members who actively work in the business. Get advice before paying family dividends.
Who can help me pay less tax in Canada?
A CPA, a tax lawyer and a licensed insurance advisor working together. Goald & Co Financial handles corporate insurance and retirement strategies for incorporated owners in BC, Alberta, Ontario and Saskatchewan.
Where to go deeper.
Primary sources cited in this guide
Disclaimer. This guide is general educational information published by Goald & Co Financial Inc. It is not tax, legal or accounting advice. Examples are illustrative composites, not real clients. Outcomes vary by province, corporation and shareholder facts and changes in law. Verify every figure with your CPA and legal counsel before acting.