I've started a business doing IT consulting, and I am the sole proprietor of that business. I charge HST for each invoice.
I went to an accountancy to calculate my business tax for the past month. However, they want me to set a salary and to buy HST, IE and CPP.
If I'm the only worker and sole proprietor, should I set another salary to take from my salary?
This is a common technique that some people do, in order to show their income level as low, but still having lots of income. When you set your company up as a sole proprietor, you can treat it like a separate entity. Actually, you should!
You are taxed less as a company, then as an individual. The goal here is that you are paying less taxes overall, and getting more benefits! For anything that is determined by your annual income, this can be helpful (i.e. alimony/child support) if you show low income. You also qualify for other tax breaks, and other tricks that better accountants could tell you about.
This also allows you to expand quicker when needed. If you find another IT consultant looking for work, you can use that freelancer to generate more income for you, while you either do more work, or sit and relax. Paying out a salary/wage, and doing the deductions, for other people or even just yourself, save you money down the line. Doing it now can be helpful.
The goal is to buy anything you can remotely need for your company, under your company's name. The house, the vehicle, the cell phone, the Internet, etc. If you put it under your company's name, you can get better deals sometimes, and even write off the taxes you pay on certain services.
I do not have the links readily available for more information, but I can certainly look, and post then later on for you to read through.
No. A salary taken out of a salary does not help anything.
As an unincorporated self-employed person in Canada, you are taxed on your net business income (Income minus eligible expenses). Your income is taxed whether you keep it in the business as cash or equity or draw it out. A salary from the business will not effect the income taxes (unless you use it for eligible business expenses or are incorporated)
To find out what you can deduct from your income as business expenses, see the CRA website here: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/bsnssxpnss/menu-eng.html
A proprietor or partner salary is specifically excluded.
