ADVANTAGES OF INCORPORATING

There are both tax and non-tax reasons for considering the corporate form of business organization

 

Tax Advantages :

There are two potential significant tax benefits of incorporation for a small active canadian Business :

-A tax deferral is possible by retaining earnings in the corporation.

-The $500,000 capital gains exemption available for the sale of a small business can only be claimed on the sale of shares of a qualifying corporation and not for the sale of a sole proprietorship or partnership.

 

TAX DEFERRAL :

Net Income of a sole propietorship or partnership is taxed directly in the hands of the owner which can be as high as 46%.  However, a corporation is a separate taxpayer with its own tax rates. Currently a CCPC (Canadian Controlled private Corporation) will pay around 15.5% tax on a net income of $750,000 dollars.

INVESTMENT INCOME :

The canadian tax system is designed, in certain instances to be neutral between income earned personally or through a corporation. As a result, after the shareholder pays tax on his dividends, the total tax burden will be aproximately the same he would have paid if the income was received directly. This neutrality means that for non-active business income the corporation will no offer any advantage vs a non-cincoprated business.

LIMITED LIABILITY :

Liability protection is generally the main non-tax reason to incorporate, and is the main motivation for most incorporations to take place.  While a sole propietor or partner has unlimited liability to creditors of the business and to each other , shareholders of the corporation have no such risk. Without the protection of limited liabilities most entrepreneurs would not take the risk of going into business. A shareholder and a director of a corporation are not the same but it can be in the case of small corporations.  While a shareholder of a corporation has limited liability, the directors of the corporation can be found liable for unremitted source deductions (payroll) and also for unremitted (trust accounts) PST and GST.