Incorporating your business can lead to many advantages and benefits

 

Income Tax Deferral: There are potential tax-deferral benefits to be enjoyed through a corporation compared to a proprietorship or partnership

Example: An Ontario business owner at the top marginal tax rate is able to retain $500,000 active income profits in the corporation, the tax deferral would be equal to $206,650 a year (53.53%-12.2% x $500,000).

 

Enhanced Capital Gains Exemption: Through incorporating a business, an individual may use the capital gains exemption when disposing of QSBC shares. The Income Tax Act (The “Act”) provides a capital gain exemption of $883,384 (indexed to the consumer price index) on the disposition of these shares.

 

Income Splitting: A company can be used to split income to family members or other taxpayers who have relatively low incomes and are subject to low marginal tax rate. However, this strategy is subject to the “the kiddie tax” or “Tax on Split Income” (TOSI) that was substantially modified in 2018.  Even with the limited rules, it is still possible to pay reasonable salaries to family members who work in the business in order to achieve a desirable salary-dividend mix. [See our TOSI article for more details].

 

Protection against personal liability: Individuals who carry on an activity is personally liable for errors or breaches of contract in the course of business activity. However, a corporation is regarded as a separate legal entity, and thus the liability of the shareholders is limited to the capital they have invested in the corporation.

 

Private Health Services Plans: The Act [note 1] provides that a benefit that is received by an employee and derived from the employer’s contributions to a private health services plan is NOT taxable. However, contributions to private hospitals and medical expenses insurance plans are deductible expenses for the employer.  A corporation may use low-taxed income through these services that would have been made by the individual from after-tax income in order to maximize after tax income.

 

Club Dues and Fees: If a corporation pays for an employee’s dues or fees in a social or sports club, the dues or fees are not deductible by the corporation. However, if there is a reasonable probability that the employee’s club membership will generate business for the employers, the dues and fees are not taxable benefits to the employees.  Thus, an absolute tax saving results to the extent that non-deductible club dues are paid by the corporation from lower-taxed income rather than by the employee from after-tax income.

 

Death benefit: A corporation may pay up to $10,00 to the surviving spouse of a corporate employee, which is received free of tax.

 

[1] Subparagraph 6(1)(a)(i)

 

This article is intended for general information purposes only and does not constitute professional advice.  Income tax law and regulation change frequently and the content on this article may no longer reflect the current state of the law. If you have any specific questions, you should consult a professional services advisor or contact us for further advice.