To Incorporate or Not Incorporate...

To incorporate or not incorporate…that is the question that many clients have asked us. You started a new and exciting business and have been running it as a contractor but people have told you that you should incorporate because you can save on your taxes. The easy answer is, it depends. So let’s dig a little deeper.

Do you have employees? You can run payroll as a contractor. You do not need to be incorporated if you have employees. You do need to make your remittances just like a corporation.

Tax returns for corporations are more expensive than tax returns for a self-employed individual and you need to file an annual corporate registries return. Your losses can be harder to write off. If you are still an employee and self-employed and you incur a loss, this loss can reduce your total taxable income. As a corporation you need to apply the loss to another year that had or will have a profit.

So why incorporate? Being incorporated limits your risk of personal liability. If the corporation goes belly up, the creditors will come after the corporation’s assets. The most common debts are wages, payroll remittances, and GST/HST owed to CRA. If you have concerns about liability, incorporating could be in your best interest.

If you are planning to build a business to sell you may be interested in the lifetime capital gains exemption. This means that if you build a business from the ground up and sell it for less than $866,912 your total gain on the sale would be tax free!

When you compare corporate tax rates to personal tax rates, you will quickly notice that it is substantially lower at the corporate level. When you are running your business through a corporation, you have the choice to choose how much to pay yourself in a given year. For example, if you require $84,000 to support your lifestyle, but your corporation has a net income of $200,000 you can choose to leave $116,000 in your corporation to lower your personal income tax. As an employee of your corporation, you would pay taxes on $84,000 but as a sole proprietor you would pay personal income tax on the full $200,000.

Income splitting might be the most attractive aspect of incorporating. If your spouse is actively participating in your business, they could earn a salary from the corporation. If they are not active, dividends could be used to split the income with a lower-income spouse. This scenario would lower the overall family tax rate.

Could incorporation be for you? Contact us to know more.