Tax Tip Thursday

We don’t talk about corporations very often and sine there is a deadline coming up.

We have been getting a lot of questions about whether you should or should not, so let’s talk about the pros and cons. One of the most important things to remember about a corporation is that it is a completely separate legal entity.

You can incorporate federally or provincially. I always incorporate companies federally to cover all your bases.

There are many advantages to incorporating as well as a potential few disadvantages. You should evaluate what is best for your business.

Advantages of Incorporation

Some important dates for personal that you might consider putting on your calendar with a reminder a month ahead of time.

• One of the biggest advantages of incorporating a business is limited liability. This means that the liability of the shareholders is limited to the amount that they have invested in their shares in the corporation.
• The personal assets of the shareholders are for the most part protected from lawsuits against the corporation.
• A Canadian controlled private corporation, or CCPC, pays a much lower rate of federal tax (small business rate – 12.2% 2023) on the first $500,000 of active business income.
• Another GREAT advantage is the flexibility to decide how and when you take the money out of the corporation for personal use.  Income can be left in the corporation if you do not need it personally. This means that you will be taxed personally ONLY on the income you take out of the corporation.
• One of the most common ways of taking money out of the corporation is through dividends. At $40,000, you pay virtually no tax personally.
• Income splitting opportunities
• If you pay yourself in dividends, you save over $7,000 in CPP contributions! (but the downside is you are not contributing towards your CPP).
• Another tax advantage of incorporation is the $971,000 capital gains deduction on the sale of shares of a qualifying small business corporation.

Disadvantages of Incorporation

• There is a small investment to set up a corporation.
• A corporate tax return can cost in the $2,000 range to prepare as opposed to $700 range for a sole proprietorship
• Business losses cannot be written off against other income of the owners (shareholders).
• Corporate tax returns are filed separately from the owners’ personal tax returns.
• If you pay yourself in dividends, it does not generate any RRSP room for the individual.

How do I Decide?

Incorporating provides many advantages to you and your business, but you must consult with a professional before making that decision.

If you are interested in setting up a corporation, we can take care of that for you. We have an incorporation package that includes:

• A name search of the Corporate registry
• Prepare Articles of Incorporation
• Register a Federal Corporation through Corporations Canada
• File the corporate registration with Provincial Registry
• Provide copies of company organization documents
• Register an HST account for the new corporation
• Register our firm as your representative with the CRA

Reach Out Today

Interested in incorporating your small business? Not sure yet and want some input on whether it makes sense for you? Book an appointment today.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.