As a business owner, you’re likely to face the decision of whether to incorporate once your business becomes successful. You’ll need to base your decision on a number of factors, both commercial and tax related.
Incorporation can bring a number of commercial benefits, such as:
Offsetting the commercial benefits are the commercial costs, including the legal and accounting fees associated with setting up the corporation and ongoing maintenance and compliance fees, such as the costs of preparing minutes, financial statements and tax returns.
The primary tax advantage of incorporation, compared to earning business income personally and paying tax at the top personal marginal rate, is income tax deferral. This deferral results because Canadian-controlled private corporations pay a reduced tax rate, in general, on the first $500,000 of active business earnings. The rate ranges from approximately 11% to 19%, depending on the province of operation. This amounts to a potential annual tax deferral of approximately $125,000 to $170,000 on this first $500,000 of earnings, depending on the province of operation and residence of the owner.
Federally, this corporate rate reduction is eroded for larger corporations with capital in excess of $10 million. Most provinces have a similar “clawback” provision.
The deferred tax will normally be eliminated when the corporate earnings are paid to the owner by way of dividends. However, the longer those earnings remain in the corporation, the greater the benefit associated with the tax deferral.
Other tax advantages of incorporating a proprietorship include:
There are also some drawbacks to operating a business in a corporation, including: