John Basler is employed in the transportation industry and earns a substantial salary. His personal marginal tax rate is 45% (federal and provincial). He also owns 100% of the shares of Truck Ltd. The corporation is a 20% partner in a small trucking business. In 20X1, the partnership earned a net profit of $80,000.
Basler intends to do some consulting work starting in 20X2 while continuing in his present employment. A small trucking company has requested that he provide advice on how to set up a proper accounting system. He would be paid on a fee-for-service basis. The contract, if he accepts it, would likely last for two years and earn him $20,000 per year. It would also use up his entire available consulting time. In the future, he may accept two or three smaller contracts a year.
Basler has requested advice on whether he should incorporate his proposed consulting activities. He has indicated that he will not require the income for personal use and intends to invest the after-tax profits.
Required:
1. What are the tax benefits, if any, to Basler if he incorporates his consulting activities? Provide any appropriate calculations.
2. Would your answer change if Basler required all of the income for personal use? Show calculations.
3. Should Basler incorporate a separate company or simply use his existing company?