Our clients include Canadian and foreign individuals, owner-managed businesses and private companies, professionals and their corporations, condominium corporations, non-profit organizations, and registered charities.

Edwin Law CA, CFP

Licensed Public Accountant

 
   Home      Faq
 
             Request A
              
                   Call Back
 
 
 
 
Newsletter


Action:



What is next after sole-proprietorship or partnership?
Business has been doing well in the past couple of years and profits have been increasing, yet your share of the profit remaining the same.  As a prudent business man, you wonder what is going on.  You suddenly realise you have a silent partner - the Canada Revenue Agency (aka the "Taxman").     
     
In Canada, sole-proprietor is taxed as an individual, and the more you earned, the more tax you pay, hence the phase "progressive tax".  You could be paying up to 50% of taxes if you reside in Ontario.  In other country, for example, Hong Kong, the tax rate is a flat 17%. Unless you are planning for the great escape, this tax rate is only a dream!  If you have such a plan in mind, the Taxman could have a last laugh on you via the departure tax.    
     
What can be done? Incorporate!  Even professional such as doctors, dentists, lawyers can incorporate.  So what is so good about it?    
     

First of all, the corporate tax rate is lower than that of personal. We are talking 15.5% a combined Federal and Ontario tax rate for the first $500,000 of active business income.  

   
     

Second, those shares you hold could qualify for the $750,000 lifetime capital gain exemption (LCGE) in the event you sell.  Note that the 2013 Federal budget proposed to increase the LCGE to $800,000 for 2014 and subsequent tax years.  The budget also proposes to index the LCGE after 2014 for inflation.  The new limit will apply for all individuals, even those who have previously used the LCFE. 

   
   

Third, the corporate structure offers limited liability to the shareholders.  That means you are not liable for any act, default, obligation, or liability of the corporation.  But your creditors may want personal guarantees from you.

   
     

Fourth, as a separate persons, the corporation does not expire when the shareholders die.  That means business can be passed on to next generation.

   
     

Fifth, income splitting opportunity between family members through salary and/or dividend mix.

   
     

Sixth, a greater potential source of capital than in a partnership as investors do not have to worry about becoming liable for the debt of the corporations.  The maximum that they can lose is the amount put in.

   
     

Seventh, setting up a Registered Pension Plan (e.g. Individual Pension Plan) for the owner/employee with the contributions funded with the corporation's before tax revenue.

   
     
With incorporation come with bookkeeping, preparation of corporation financial statements, corporation tax return (in addition to personal tax return), payroll and yes, possibility of an audit by the Taxman, etc.......    
     

Incorporation should be part of your overall business/tax planning strategy.  The best way of minimizing or deferring income taxes payable is to maintain proper and accurate records and ensure that you have at your disposal the tax and accounting expertise you require in taking the full advantage of the rules under the current Income Tax Act (ITA).

   
     
You should give incorporating your business some serious thoughts if you want to bring you business to the next level.    
Last update: 2013-05-17 18:19
Author:
Revision: 1.6
PageViews: 5608
Average rating: 2.9 out of 5 (30 Votes )
Tags: -
Related entries: -
Revision: 1.6
Others in this Category

Copyright 2015, Edwin Law, CA, CFP, Licensed Public Accountant, All Rights Reserved.

 
Follow TaxIdeaSharing on TwitterView Edwin Law's profile on LinkedIn