Tax planning: optimizing taxes in Quebec
Incorporation
A Canadian-controlled private corporation benefits from the small business deduction on the first $500,000 of active business income, which significantly reduces the combined rate. In Quebec, the reduced provincial rate is subject to conditions (notably a minimum number of paid hours, 5,500, for most sectors). Profits left in the corporation are taxed at a low rate until distributed.
Salary or dividends
- salary: deductible for the corporation, creates RRSP room and QPP rights;
- dividends: no payroll contributions, but no RRSP room;
- a mix is often optimal and depends on personal needs and income level.
Income splitting
Since 2018, the tax on split income (TOSI) applies the highest rate to dividends paid to family members who do not actively participate in the business, subject to exceptions (spouse of an owner aged 65 or over, active involvement of at least 20 hours a week, etc.).
Other tools
Holding companies (protection of assets, intercorporate dividends), estate freezes, RRSP, TFSA, individual pension plans, capital gains exemption, R&D and other tax credits.
Limits
Tax planning must be legal: the general anti-avoidance rule (s. 245 ITA; strengthened in 2024) and Quebec’s disclosure rules for aggressive transactions can nullify abusive schemes and impose penalties.
