Peter is an executive at a large financial firm, earning a salary of more than $600,000 a year. Peter is also a sole proprietor of a business that will have active business income earned in Canada of $98,000 this year. The province where Peter lives charges a provincial tax rate of 16% on taxable amounts above $500,00.00 The province does offer a dividend tax credit is equal to 4/13 (31%) of the gross up portion of non-eligible dividends. The province’s corporate tax rate is 3% on income eligible for the small business deduction and 15% on other income.

Peter wonders what, if any tax deferrals or savings that will be available, he incorporated the business left the $98,000 of income in the corporation. He also wonders if there would be any tax savings if the $98,000 was paid out to him in dividends.

Required:

Calculate:

1. Total Taxes Payable (Federal and Provincial) by Peter on the unincorporated business income.
2. Total Taxes Payable (Federal and Provincial) by Peter if he incorporates the business.
3. Total Taxes Payable (Federal and Provincial) by Peter if he pays himself the dividend.
4. Is there a tax deferral by incorporating the business and leaving the income in the corporation? If yes, how much?
5. Is there a tax savings by incorporating and paying himself $98,000 in dividends? If yes, how much?