Is It Time to Incorporate?

The journey of starting and running a business involves a number of landmark moments, many of which may come with new tax considerations. One of the most important is incorporation. How do you know when it’s time to make it happen and what does it mean for your taxes?

What Does Incorporation Mean?

If you’re considering incorporation, you probably know that it establishes your company as its own distinct legal entity with ownership split between shareholders. However, it means quite a bit more than this. Most notably, it reduces the personal liability of shareholders for the debts and other obligations of the company, with certain exceptions. You’re generally only obliged by what you’ve invested in the form of shares. It’s important to note, however, that shareholders of small corporations will be held liable for bank loans in the early stages of funding. Furthermore, personal liability for issues such as negligence or fraud are still retained.

Knowing When It’s Time

The first question to ask yourself is, “Where is my company now and where do I want it to go?” In other words, it’s important to assess the current size and projected aspirations of your proprietorship or partnership. Is it large enough that you don’t want to risk personally losing your assets through heightened liability? Do you have enough financial legroom to bear the costs of the incorporation process? Do you want to take the next step in raising more capital for your company, building relationships internationally, and passing the company down to your heirs? Answering yes to these means you have a strong indication that it’s time.

Thinking About Your Taxes

Incorporation will change the tax considerations of your business significantly. For instance, with the small business deduction, a CCPC pays a lower federal tax rate on the first $500,000 of active income each year. These and other upsides significantly lower personal tax burden. Overall, incorporation requires considerable setup and administrative costs, a more complicated structure, and more administrative work, but if you’re earning significantly more from your business than you need to live, the tax benefits can really pay off when you have a good corporate accountant to help you secure them.

If you’re about to incorporate, you’ll need an accountant who has both big-league corporate tax experience and the ability to work on a personalized level. This is what our team has provided to Canadian businesses for years. To set up a complimentary consultation, send us an email today!

Understanding the Proposed Tax Changes for Entrepreneurs

In July of 2017, Finance Minister Bill Morneau put forth a handful of proposed changes to corporate tax rules. These had far-reaching implications for any business with CCPC status. They’ve developed significantly since their initial introduction, so here’s what you should know.

Income Sprinkling

Income sprinkling — or income splitting — is a tax planning strategy that allows family members of corporation owners to earn income through the company at a lower marginal tax rate. The proposals aim to limit this strategy by only permitting the lower tax rate for family members who make demonstrable labour contributions to the company. These changes have since been simplified and amended, including exemptions for spouses or other family members under very specific criteria. However, for many larger private corporations, the limitations are still considerable, so you may want to consult with an accountant to navigate this change.

Corporate Capital Gains

Many CCPC owners have elected to save on tax expenses by converting after-tax earnings of the company into capital gains rather than receiving them as shareholder dividends. This is because the former is typically taxed at a lower rate than the latter. The changes proposed last year were designed to modify the existing rules and curtail this strategy. However, after responses from many business owners concerning unintended consequences, such as double-taxation on shares acquired between siblings or through intergenerational transfer of businesses after death, the Department of Finance has decided not to pursue these changes.

Passive Investment Income

Another affected practice is the earning of passive income with investments made through the company. Investing with surplus revenue from the corporation avoids paying personal tax on those investments until they are withdrawn later. Last year the Department of Finance proposed measures to tax this passive investment income at the top personal tax rate. Once again, revisions to this have been made more recently, such as a $50,000 annual threshold. However, larger corporations will still need to re-strategize if they have previously used this method to build savings cushions for economic downturns, retirement, or other purposes.

The security and success of your business rests significantly on how well you navigate a wide range of tax issues. The new tax policy changes will go into effect starting with the 2018 tax year, and we’re here to help every step of the way. Call (403) 456-0072 for a free consultation!