Jane operates a consulting business that produces a taxable income of $100,000 per year. The business is set up as a proprietorship, so the taxable income is treated like salary income for Jane, from a tax perspective. (Its the same as if Jane had a job that paid that amount of salary). Jane can claim $11,474 as a federal personal exemption against her personal income. (This value comes from Table 12-2). The applicable individual federal income tax table is in Table 12-1. Jane is considering incorporating her business. If she does, she will pay herself a salary of $35,000 a year from the corporation, upon which federal income tax must be paid. The corporation will then pay taxes on the remaining $65,000. A federal tax rate of 15% will apply, (this value is from Table 12-3).The corporation will retain the balance (as retained earnings). For this problem, you can ignore provincial taxes (which would also normally apply).

a.How much tax will Jane pay if she continues to operate the business as a proprietorship?

b.How much tax would she pay if she incorporated her business, both personally and through her corporation?

c.Should she incorporate (will her taxes go down)? How much will her taxes change by?

TABLE 12-1 Individual Federal Income Tax Structure (2016 rates) Tax Rate 15% 20.5% Taxable Income First Amount between Amount between Amount between Amount above $45,282 $45,282 and $90,563 $90,563 and $140,388 $140,388 and $ 200,000 $200,000 26% 29% 33% Table 12-2 Basic Personal Exemption (2016) Federal Manitoba $11,474 9,134 10,011 Ontario Table 12-3 2015 Marginal Tax Rate on Active Business Income over $500,000 Province or Territory Provincial Rate Federal Rate Combined Rate British Columbia 11.0% 15% 26.0% Alberta 10/12% 15% 25/27% Saskatchewan 12.0% 15% 27.0% Manitoba 12.0% 15% 27.0% Ontario 11.5% 15% 26.5% Quebec 11.9% 15% 26.9% New Brunswick 12.0% 15% 27.0% Nova Scotia 16.0% 15% 31.0% Prince Edward Island 16.0% 15% 31.0% Newfoundland and Labrador 14.0% 15% 29.0% Yukon 15.0% 15% 30.0% Northwest Territories 11.5% 15% 26.5% Nunavut 12.0% 15% 27.0%