Written by Charles Hargest, CPA, CA
As the operator an unincorporated business, tax-planning opportunities may become available by incorporating, particularly if the company qualifies as a small business corporation (SBC). A SBC is a Canadian-Controlled Private Corporation (CCPC) where at least 90% of the fair market value of the assets are used in an active business carried on in Canada. Through incorporation, you will become the shareholder and employee of a separate taxable entity, without triggering any income tax.
1. Limited Liability
A sole proprietor is liable for business debts and many subject his/her personal assets to creditor claims or lawsuits that may arise in the business. As a shareholder, to the extent that you have not provided personal guarantees, generally, you personal assets should be protected. However, directors and officers of the corporation may be held liable for certain activities of the corporation.
2. Small Business Deduction (SBC)
Active business earning of a CCPC may be eligible for reduced rates of Federal and Provincial tax. The Ontario small business rate is 15.50% on the first $500,000 of taxable income and 26.50% thereafter.
3. Deferral of Tax
For a sole proprietor in Ontario, once regular earnings reach $220,000, income will be taxed at the top marginal personal tax rate of 49.53%. For an Ontario CCPC, active business earnings are taxed at 15.5% on the first $500,000 of taxable income. Funds not currently required personally can be retained in the corporation for corporate uses, providing a deferral of up to 34.03% until dividends are paid.
4.Tax deferral on bonus
By choosing an appropriate year end of the corporation, a bonus can be declared and deducted by the corporation in its fiscal year, but not taxed to you until the following calendar year.
5. Estate Planning and income splitting
Through structuring of the company's share capital, you can maintain your investment and control in the corporation while providing for future company growth to accrue to shares held by others. This can provide for ongoing income splitting with family members and minimize taxes arising on your death.
6. Capital Gains Exemption (CGE)
The lifetime CGE, available to Canadian residents, shelters up to $800,000 of capital gains from tax on the sale of private company shares, which are qualifying dispositions. There may be opportunities to multiply the CGE with other family members. Careful planning is required to take or eliminate any income taxes on the disposition of your company shares.
7. Allowable Business Investment Loss
If your private corporation should fail, the loss of your investment in shares or debt may qualify as a business investment loss, one half of which would be deductible against any income source.
Source: The VOICE, Markham's Exclusive Business Magazine, 2015 Spring Issue. Page 17. (Markham Board of Trade, Markham's Premier Business Association)
Written by (Author): Charles Hargest, CPA, CA. Senior Manager, Tax BDO Canada LLP Markham