Why Incorporation of a Proprietorship or a Personal Real Estate Corporation?

The most common question business owners ask is whether they should incorporate their businesses, and the most frequent answer is that the corporation pays a much lower tax rate. Is that all? Or should every business incorporate. Unfortunately, it is not a cookie cutting situation and each business situation is unique.

In general, there are many advantages and opportunities available in addition to tax considerations. However, let’s start with the tax differences. In Ontario, the rate for a Canadian Control Private Corporation (“CCPC”) starting January 1, 2020 would be 12.2% for the first $500,000 profit vs. 53.53% for personal taxable income over $220,000; it is a 41.33% tax deferral opportunity for a high-income earner. For an individual who is making more than $97k but less than $150K, the marginal tax rate they are paying is about 43%, it is still considerably significantly higher compared to a corporation.

Secondly, a corporation is legally separate from its shareholder(s), meaning it is responsible for its own acts and its own debts. This limited liability protection is one of the main reasons that businesses choose incorporation over other forms of business such as sole proprietorships or partnerships. As all businesses are not without risks, a protection of personal or family assets is highly important, and a corporation can provide an extra layer of protection to the owner’s family.

When businesses grow and make profits, a timing of income to its owners and opportunity for income splitting should not be ignored. Furthermore, one huge benefit that the government gives to owners of CCPCs is the lifetime capital gains exemption (“LCGE”) of $883,382 (For the year 2020 and indexed yearly afterward). Each shareholder could potentially shelter a capital gains from a sale of the shares of the corporation tax free up to the LCGE amount.

Currently, most businesses can be incorporated, and certain regulated professionals are also allowed to incorporate a Professional Corporation (“PC”), i.e. doctors, dentists, lawyers, accountants, chiropractors, veterinarians, optometrists, etc. In the near future, realtors may be able to incorporate a Personal Real Estate Corporation (“PREC”) as well. On March 4, 2020, the proposed changes to the Real Estate and Business Brokers Act received Royal Assent, however the supporting regulations are not yet finalized.  Please contact us to assess whether incorporation is right for you and exploring the opportunities.

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 email us for further advice.