In the corporate income section of this website there are notes on tax rates for corporations. Canadian Controlled Private Corporations are entitled to a low tax rate on taxable income up to the small business threshold from an active business. This low tax rate is attractive, but incorporation of your business may not be the best course of action for you.
Some Reasons Not to IncorporateThere are no tax savings from the corporation if all business income is required for salaries.
Expenses of a corporation can also be deducted in an unincorporated business ("UB") including salaries to a spouse or child involved in the business.
In the start up phase you may incur losses. Losses in a UB can be used to reduce taxes on other forms of personal income.
· You can always transfer the assets of your UB at a later date, although extra costs are
· If the business fails, your UB losses have been utilised. Losses in a corporation are
locked into that entity.
Incorporation of a business typically costs about $500 in Provincial filing fees plus legal fees and related sales taxes. Annual returns must be filed in the Provincial records office to keep the company in good standing resulting in ongoing legal fees. Accounting fees are higher on an annual basis as a corporate tax return must be prepared and a more sophisticated accounting system may also be required.
Some Reasons to IncorporateProtection for personal assets afforded by a distinct legal entity. Legal counsel should be sought to ensure this actually works in your situation.
A corporation may appear more permanent to suppliers and customers.
There is surplus income (beyond what you need for personal salaries). Those after-tax corporate dollars can be invested or used for expansion. (Note that investing those funds may incur higher taxes on the investment income.)
There is little or no surplus income, but there is a build up of assets (eg: capital assets or accounts receivable) that is cheaper to finance with after-tax corporate dollars as opposed to after-tax personal dollars.
Family trusts have been effectively eliminated for use with minor children, but such trust can still be an effective tool for children over 17. Surplus corporate income can be directed to your children to assist in the cost of university, for example.
As of 1995 new UB's must have a December yearend, but corporations may have a yearend at any time in a year, since corporations do not all file tax returns at the same time of year. A non-calendar yearend may be useful in tax planning or in dealing with the business cycle.