My_question_is: Applicable to both US and Canada
Subject: IRS 5471
Expert: taxman at centa.com
Date: Tuesday November 22, 2005
Time: 06:07 PM -0800
QUESTION:
I hold dual US and Canadian citizenship, and I work as a consultant in the
Information Technology field.
In April of this year, I incorporated in order to limit risk in the event of
a lawsuit related to errors and omissions, and to have greater access to
consulting contract - many clients require incorporation to avoid WCB, CP,
and OAP liabilities in the event that CCRA deems me to be an employee of the
Client etc etc.
As far as I can tell, I am a Category 2 filer of IRS form 5471, as I am the
sole shareholder and president of my incorporated Company. The question I
have is whether I should be drawing a salary (Earned Income) or receiving
Dividend Income from the Company, for my role as President? In other words,
which approach would yield a lower combined (US Personal + Canadian Personal
+ Canadian Corporate) tax liability?
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==
david ingram replies:
I have not done the calculation for a while but the last time I did it,
taking a $40,000 salary and the rest in dividends "increased" the overall
tax by about 1/2% when you added the corporate and personal tax together.
In addition, a salary of up to $80,000 US is exempted under US law and as of
2005 does not affect the AMT calculation. On the other hand, the dividends
or retained earnings become taxable and require 116 forms to be filed.
You have to do the specific calculations to get your answer.
I know why you have the Cdn Corporation but you have lost the benefits of a
proprietorship.
With a corporation, it is extremely difficult to make your personal mortgage
deductible.
Try reading the November 2001 newsletter in the top left hand box at
www.centa.com
============================
For the purposes of the 5471, it is 1000 times easier to do the form if you
have paid all the profit to your self or you and your spouse as a salary
leaving zeros for the 5471 calculations.
============================
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