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Taxes on Profit Sharing (Canada)

SatanIsMyMotorSatanIsMyMotor Registered User regular
edited October 2008 in Help / Advice Forum
I've done some research on this and I've come up with nothing. First some background info:

At the company I work for all of the employees are incentivized by a certain percentage profit share in the organization. Depending on your role you get a different percentage. The way it works is we're given a revenue target for the year (let's say $1.2 million just for fun) and any revenue we make over that goes into the profit sharing pool. So let's say we make $1.4 million that means $200K goes into the profit share - of which I would get 5%.

Now, what I'm wondering is this - how do the taxes work on this? Is it just typical income tax or is there a smarter way to do this. As it stands, the way the taxes work out we lose about 40% of the money to the government right away and for some people (ie: Me) it artificially bumps me up into a higher tax bracket that I really can't afford based on my current salary. For all I know next year I could get no bonus and with paying higher premiums throughout the year that could leave me in a bad position - it would essentially be like I was being taxed as though I had, say $60K for the year when in actuality my salary is $40k.

Does anyone have any experience with this sort of thing? I assume I'm probably just boned but I wanted to ask the question anyway.

SatanIsMyMotor on
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Posts

  • SarcastroSarcastro Registered User regular
    edited October 2008
    There are a couple of different ways to shelter the monies, it depends how much we are talking about. If it's 10K, max out your RRSPs. That makes your income appear lower, and its pretty much tax free. You can then spend those monies on certain things.

    If you just out and spend it, it's going to get taxed. If you look to invest it, there are ways to shelter it. I don't know enough about it to be of much help, but if its over 20K, talk to a dude about it. Financial planners can help you invest wisely and get as many tax breaks as possible. Good CPA's are expensive, but considering how much you have to lose (40% of whatever you make over your bracket) you can spend a little and save a ton.

    Edcrab wrote: »
    "See," said Lucifer, "God's an asshole."
  • Steve BennettSteve Bennett Registered User
    edited October 2008
    First off, there's no such thing as free money - all income is taxed.

    In your case, there are 2 possible situations:

    1. The 'bonus' profit sharing amount will be taxed as its paid to you (just like regular pay), so the regular deductions will come off, including tax. The amount will also be included on your T4 as total gross income, for income tax purposes.
    2. The 'bonus' profit sharing amount will be awarded to you in full, and Revenue Canada will expect you to claim that as extra income on your anual income taxes. Failure to do so warrants tax fraud and can be prosecuted. This will mean you will likely owe money when you do your taxes, but it will all balances out in the end.

    The idea that it "artificially bumps you into higher tax bracket" is false.. if you make $50,000 through regular salary, or you make $40,000 regular + $10,000 bonus, you've made the same amount, and your tax burden should be equivalent. Fair is Fair.

    Edit: Sarcasto's comments are true regardless of bonus or not.. reducing your tax burden through RRSP contributions or charitable donations or whatever is generally always a good idea.

  • SatanIsMyMotorSatanIsMyMotor Registered User regular
    edited October 2008
    If I was to receive the money untaxed and funneled as much as I could into my RRSPs to max them out would I only be taxed on the remaining sum that was unable to go to RRSPs?

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  • ThanatosThanatos Registered User regular
    edited October 2008
    Quick lesson on how taxes work:

    Being bumped into a higher tax bracket is not going to make you lost money. Your entire income isn't taxed based on the bracket, just the income that falls into that particular bracket. So, say Canada has income tax brackets of 20% up to $40,000, 25% up to $80,000, 30% up to $120,000, and 40% above $120,000. You make $200,000 in a year. You're not going to pay 40% of that $200,000; you're going to pay 20% of the first $40,000, 25% of the next $40,000, 30% of the next $40,000, and 40% of the last $80,000.

    If Canada is anything like the U.S., you should be able to reduce the amount of your deduction by filling out a simple form. Also, when you do your taxes, I'd be surprised if they didn't have a "one-time bonus" area for which to put in your bonus for the profit-sharing.

  • SarcastroSarcastro Registered User regular
    edited October 2008
    If I was to receive the money untaxed and funneled as much as I could into my RRSPs to max them out would I only be taxed on the remaining sum that was unable to go to RRSPs?

    Bingo. In theory, you get taxed when you withdraw them, but if you spend that money on certain gov approved items, like your first home for example, you don't get taxed at all.

    Other means include spending that cash on education, which is all deductable, or on business items which may or may not be tax deductable (talk to your dude). Those are just the ones I know about, which isn't much really, I know there are others. My mom is a rockstar when it comes to such things.

    She incorporated my family at one point (don't ask me how, I don't really understand that kind of thing very well) so that the mission objective of the business was to maintain the lifestyle and well-being of its employees. Technically, I'm the vice-president of a wealth and wellbeingmanagement company, and there are a great many things that I would be allowed to write off as business expenses. I don't much, to be honest- it's a shitload of paperwork and I don't really have an issue with rendering unto Ceaser, but my brother takes full advantage and has caught some pretty decent breaks.

    Thats just an example of what can be done if you really want to get into it, there's always a price, generally in the form of well... forms and such, and you always have to pay something. But there is a legal provision within the law that says you are allowed to do whatever you wish to reduce your taxes as long as it is legal, and there are a number of loopholes one can jump through if you want to play the game.

    Edcrab wrote: »
    "See," said Lucifer, "God's an asshole."
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