What incorporating does
The business becomes a separate legal entity. The corporation earns the income, files its own T2 corporate tax return and pays you, usually by salary, dividends or both.
The tax advantages
The small business rate
The first $500,000 of active business income is taxed at roughly 12 to 13 percent, depending on the province, against personal rates that exceed 50 percent at the top.
Deferral
Profit you do not need can stay in the company, taxed only at the corporate rate until you withdraw it. That leaves more capital to reinvest.
Income splitting
Within the limits of the tax on split income (TOSI) rules, a reasonable salary or dividends can be paid to family members in lower brackets.
Lifetime capital gains exemption
On the sale of shares of a qualifying small business corporation, roughly the first $1 million of gain can be sheltered by the LCGE.
When it does not help
- You withdraw everything you earn: there is no deferral, only the added cost of running a corporation
- The business is losing money: a sole proprietor can use losses against other personal income; a corporation cannot
- You are in a low personal bracket: the deferral is small and may not justify the complexity
Other considerations
Incorporation adds legal, accounting and annual filing costs. Limited liability is real but not absolute, and for regulated professionals it does not extend to professional liability. The corporation needs its own business number, payroll account and HST account.
Should you incorporate?
It deserves serious thought if you consistently earn more than you need, or plan to grow and eventually sell. It is not worth doing because others have. We run the numbers with your figures and goals: see advisory or read how to know if it is time.