How to accumulate wealth in Canada from an income tax perspective
Author: John Yang, CPA, CA, LPA
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If you’re looking to build a secure financial future, accumulating wealth is an essential step towards achieving that goal. While wealth accumulation may seem daunting, it’s important to remember that with the right strategies and mindset, dentists and dental professionals can use a modular approach to achieve their financial goal. In this article, we’ll explore the big picture of wealth accumulation under the Canadian income tax systems.
Canada essentially has a two-tiered income tax system. They are the personal tax system and the corporate tax system.
The personal tax system has high income tax rates at even a moderate amount of income level. For example, an individual who personally earns $150,000 would be paying approximately $50,000 of income tax. The individual’s personal average tax rate would be 33% and marginal tax rate would at 43%. For every additional dollar earned, the incremental income tax is almost half of that dollar. Considering that the person still has 13% sales tax in Ontario (some what equally high amount in other provinces of Canada, except Alberta) to pay on his/her expenditures, together with property tax, there isn’t much left to be saved in the first place.
However, when we look at the Canadian corporate tax system, the tax environment is much more friendly. Small business deduction, which is to a certain degree harder and harder to maintain, but in a simple one business per individual or family environment, for the first $500,000 of income corporate tax is at 12.2% in Ontario. Considering Hong Kong which is generally viewed as a tax heaven, their tax rate is at 15%. This is extremely taxpayer friendly. For Canadian corporations which makes more than $500,000, the corporate income tax rate is at 26.5%. The business owner gets to keep three quarters of what they earn, which is generally still viewed as a reasonable deal.
So in essence the Canadian income tax system has a high rate personal tax system, and a low tax rate corporate tax system. It is important to recognize that wealth accumulation needs to occur at the low tax environment because the income tax is going to be the single biggest expense for any business or individual in their life. The lower tax environment essentially ensures more money available to reinvest into a business or investment assets, which leads to significant advantage in terms of wealth growth. Just consider this, anything you invest at corporate level the cost of investment is about 30 to 40% cheaper, regardless if it is an Apple stock, or an investment condo property.
Therefore, the big picture should be very clear, that is to earn as much as you can at corporate level, only draw out what you need to maintain lifestyle, and keep the rest inside the corporation, so you can avoid and defer personal tax.
It is fortunate that dentists can create professional corporation with minimal adverse tax risks so these clients can achieve wealth accumulation at corporate level without too much headwinds.
In conclusion, understanding the big picture of Canadian income tax system can impact wealth accumulation is an essential part of building a secure financial future. By putting these big picture principles into action, a dentist or dental practice professional can start on the path towards building wealth and achieving their financial goals. Remember, most of the population are equally intelligent, it is the persistency and determination make the ultimate differences. Success can be modular and often copied from case to case. It is not difficult or challenging to be successful as long as you work hard, keep an open mind and keep learning from other successful people. May you find this article informative, and may you achieve your goal of wealth accumulation.
About the Author:
John Yang, CPA, CA. LPA. is the principal of Yang Chartered Professional Accountant P.C., which is an CPA firm specialized in dentistry. John is a frequent speaker on various dentistry topics, including Canadian income tax planning, wealth management, dental clinic management and dental clinic performance analysis, and dental clinic transaction planning, etc.
If you find the above article to be interesting and entertaining, and would like to find out a more customized accounting and tax solution for your and your family, please feel free to reach out to John Yang at email@example.com.