A local accountant is addressing the question that every business owner must at some point consider: Is it time to incorporate?
While the motivations and potential benefits (and drawbacks) to incorporating are going to vary for each business owner, chartered professional accountant Nicole Cahoon says the answer generally comes down to one major factor.
“If you’re earning more income from your business than you need to draw from it, it’s generally a good time to have that discussion with your accountant,” says Cahoon. “One of the main reasons to incorporate is the lower corporate tax rate compared to personal marginal rates, which is what you pay as a sole proprietor or partnership. If your business can retain earned income within the corporation, you can defer tax to future years on that income to the extent that it’s not distributed to you as a salary or dividend.”
Further reducing those taxes on corporations, she says, is the federal small business tax deduction, which applies to the first $500,000 of “active business income” earned by a Canadian-controlled private corporation. Cahoon notes, however, that there are some exclusions to the deduction, such as property income and income earned through a personal service business.
“It’s really important that if you’re thinking about incorporating you talk to your accountant to make sure you fully understand the tax implications and how they apply in your case.”
Another factor that may affect the decision to incorporate or not is the legal protection a corporation can provide. Here too, however, Cahoon warns that the protective shelter of a corporation may not extend as far as many people think.
“A corporation won’t protect you from all forms of liability,” she says. “Generally speaking, your liability is limited to the amount you invest in the company for your shares. In some situations, that protection disappears altogether, like if you guarantee a loan for the corporation or there’s GST or payroll tax owing to Canada Revenue Agency.”
Even once the decision to incorporate is made, it’s not necessarily a simple affair, as rules regarding the transfer of capital assets and the sale of shares could have serious tax implications and should be carefully considered.
“At the end of the day, incorporating your business is a complicated process,” says Cahoon. “I’d caution anyone considering incorporating to seek professional advice to ensure the resulting corporation is structured appropriately. With appropriate planning alongside your accountant, incorporating can be extremely advantageous.”