Posted on November 26, 2013 in Corporate Tax Personal Tax Small Business Tax Planning
Considering Incorporation?

Often times, clients ask me how much money they need to earn to have a Corporation. Well, I don’t necessarily believe that there is a magic number or a “one-size fits all” answer. Certainly if you spend every penny that your business makes, then you may not benefit from the low tax rate (currently 11% combined Federal & BC), however, there could be many other benefits and reasons to do so.

A Corporation is considered a separate legal entity. And yes, there are additional fees that come along with running a corporation however there are many benefits that stem from using one, besides the low tax rate as mentioned above.

When helping new businesses or clients with making the decision to operate as a sole proprietor vs. incorporation or when the business has already been operating as a sole proprietor and are now considering becoming a Corporation, these are just some of the things that I also like to consider:

  • PERSONAL LIABILITY & PERSONAL ASSET PROTECTION. How risky is the business you are in? Do you or your personal assets (house, cars, etc.) require personal protection from being sued? This isn’t so much of an issue with borrowing money from the bank as they will likely have a personal guarantee on any loans but more the liability protection from customers, clients or patients is something to consider. Having liability insurance may be sufficient but something to consider nonetheless.
  • TAX YEAR. You have the ability to choose any year-end that you want; it doesn’t have to be December 31. This can allow for tax deferrals.
  • BUSINESS NAME. A corporation has greater protection over the use of a business name.
  • FAMILY TRUST. How old are your children? If they plan on attending post-secondary education, will you be paying for their tuition? With a Corporation, you can use a family trust to pay them which in turn can be used to pay their tuition and help with living expenses. This type of plan will likely require a higher income to support and offset the additional fees incurred with operating a trust.
  • LIFE INSURANCE. is typically paid with after-tax dollars. Therefore, when you pay this personally, you are paying it with money that has already been taxed. So if you pay tax at 40%, the insurance is paid with the 60% leftover. Your company can have a life insurance policy whereby the corporation is the beneficiary. The life insurance policy is not tax deductible however at the corporate tax rate of 11%, you are paying it with the 89% leftover (as opposed to 60% personal). When the life insurance policy is paid out to the Corporation, it is then able to be paid to your personal estate tax free through capital dividends.
  • INCOME SPLITTING WITH SALARY.  Is your spouse working but earning considerably less than you? Or maybe they are a stay-at-home parent? With a Corporation, you have ability to split income with your spouse. They could earn a reasonable salary (or see below for dividends) for work done for the company; i.e. social media, bank deposits, cheque writing, bookkeeping, marketing, etc.
  • INCOME SPLITTING WITH DIVIDENDS. Your spouse could be a non-voting shareholder of the company which means they don’t have a vote on deciding how the business is run however as a shareholder, this would allow splitting income with them through the use of dividends. Dividends are paid out with after-tax corporate dollars and therefore when taxed personally, there is a tax credit available that can offset the tax on the dividend, depending on how much has been taken.
  • BUSINESS TO BUSINESS. It is very common nowadays to see Corporations moving away from having employees and using contract staff instead. And in many cases, these businesses will only do business with Corporations. *Just be careful that you don’t end up as a PERSONAL SERVICES BUSINESS.

Canada Inc.As you can see, there are many things to consider when choosing to start a corporation or changing from a sole proprietor to a corporation

ALWAYS seek the advice of a Professional Accountant. And use a lawyer when incorporating; this will ensure that your corporate documents are set up properly.

***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is also subject to change without notice.