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Home TAX TIPS Our Tips Incorporate or not

Incorporate or not

If you are a self-employed small business owner, you may wonder whether it would be more beneficial to perhaps incorporate your operations. We’ve gathered the most frequent questions about incorporation hoping that answers to them will help you make a decision whether to incorporate or not.

1. What is corporate tax rate?

Canadian private corporations are taxed at 16.5% on their active business income. It is important to remember that investment income is subject to a much higher tax rate. For this reason incorporation of the investment income produces no tax advantage.

2. Will I save on taxes by incorporating?

It depends. If you extract the entire profit earned as salary, you will be in the same position as if you operated as sole proprietor. However, if you leave some profits in the company, you can enjoy lower corporate tax rate and eventually take payments as dividends, which are subject to a lower tax rate than regular income.

3. As a director am I still responsible for corporate income tax?

Incorporation allows for separation of personal and business assets. Directors’ liability is limited to salaries and wages, as well as related remittances. GST also remains directors’ responsibility.

 4. How is professional corporation different from a regular one?

Professional corporation can only be formed by members of a given profession such as lawyers, doctors, or dentists. Members of the immediate family who are not professionals cannot hold voting shares in such corporation. Professional shareholders maintain the personal liability as if they were unincorporated. All professional corporations must be approved by the profession’s governing body.

5. What are other advantages of incorporating?

A corporation may choose a year-end, different than calendar year and therefore it’s filing deadlines can be different from your personal tax filing. This may leave an owner-manager more room for effective tax planning.

It is important to remember that filing of the corporate income tax and maintaining proper records is much more complex for corporations. Double entry accounting system is required as financial statements must be prepared for each year-end, including balance sheet and income statement. There are many additional points unique to each situation that must be thoroughly considered before incorporating.