Is it time to incorporate? It depends. BDO’s Scott Conner explains

Is it time to incorporate?

If you are a self-employed individual there are many tax planning possibilities that become available to you by simply incorporating. As long as you remain a sole proprietorship all your profits will be taxed as personal income which could involve income tax rates as high as 53.53 per cent.

But when is a good time to incorporate? The answer is: it depends.

Avoid trapping losses in your corporation:

A business with anticipated losses and little legal risk should likely be kept as a sole proprietorship. If you run an incorporated business at a loss and then shut it down those losses are gone with that corporation. All you can claim is the money you lent or invested in the business as shares or loans.

Limited liability:

By incorporating you become a shareholder and potentially limit your exposure to debts or other liabilities incurred by the corporation. Your personal assets likely become protected from the creditors’ claims in any lawsuits or other liabilities arising in the corporation.

Take advantage of the small business deduction:

Active business earnings of a Canadian control private corporation are eligible for special reduced rates at both the federal and Ontario levels. Corporations can enjoy tax rates at 15 per cent or lower in certain circumstances.

Access the capital gains exemption:

If your business can potentially be sold at some point, then incorporating allows you to make use of the capital gains exemption. In 2016, you may have been eligible for an $824,176 tax-free gain on a share sale.

Income splitting:

If your corporation is a small business corporation your spouse can be a shareholder and receive dividends, without concern for the corporate attribution rules. However, the federal government in its 2017 budget announced its intention to release a paper that will address tax planning using private corporations. Specifically, the following three areas have been said to be areas of concern:

• Income splitting using dividends to lower-income family members;
• Building passive investments portfolios inside a private corporation; and
• Receiving distributions as capital gains.

Is income splitting in jeopardy?

Authoritative sources have recently expressed concerns about what the federal government might be targeting. As announced by Minister Morneau at a recent Board of Trade speech in Toronto, many expect the government to release a consultation paper in the coming days or weeks proposing changes to the way private corporations are taxed as a way of dealing with tax savings strategies many business owners have routinely relied on in the past.

Other articles from Scott Conner –

How do you treat your principal residence for tax purposes – BDO’s Scott Conner explains

Saving tax with moving expense deductions – BDO’s Scott Conner explains

Can you claim your home office as a tax deduction? BDO’s Scott Conner explains

These tax tips are general in nature and should not be relied upon to replace the requirement for specific professional advice. If you have questions about incorporating, contact the Huntsville office of BDO at 705-789-4469. Scott Conner is a Tax Partner at BDO Canada LLP. With over 15 years of experience as CPA, CA specializing in Canadian income tax, Scott helps a variety of individuals and private corporations pay the least amount of tax possible with great tax planning strategies. He also specializes in planning for estates, trusts, and non-resident dispositions of real estate.

Scott Conner is a Tax Partner at BDO Canada LLP. With over 15 years of experience as CPA, CA specializing in Canadian income tax, Scott helps a variety of individuals and private companies pay the least amount of tax possible with great tax planning strategies. He also specializes in planning for estates, trusts, and non-resident dispositions of real estate.

Scott Conner, CPA, CA
Tax Partner
BDO Canada LLP
Direct: 705 789 4469 ext 1824
[email protected]