Problem
Nancy Ball presently operates a retailing proprietorship with a December year end and makes
$ of net income for tax purposes annually. She is thinking of incorporating her business and has
asked for your advice. She lives in a province where the provincial corporate tax rate is of this type
of federal taxable income. She has $ of federal personal tax credits, $ of provincial personal
tax credits, and no other income.
You have agreed that you will do the following:
A Estimate the personal taxes that Nancy would pay currently on $ of business income
compared with the amount of corporate and personal taxes that would be paid if she incorporated her
business and only took out a salary of $ Ignore all payroll taxes eg Canada Pension Plan
premiums when making your estimates.
B Based on your calculations in A estimate the amount of personal tax that Nancy defers by
keeping the remaining aftertax retained earnings in her company this year. Hint: compute the
additional personal tax that she would pay on a dividend equal to the corporation's aftertax retained
earnings.
