Should you incorporate?

Deciding to incorporate?

We are often asked for advice relating to the incorporation of a small business.

Incorporation is a business structure available to you to conduct your business activities. A corporation is a legal entity and is considered to be a separate person for tax purposes – it has to prepare its financial statements and file its own corporate tax returns with CRA.

Benefits of incorporation

1.  You are able to creditor proof your personal assets. You can limit your personal liability through incorporation by keeping your personal and corporate assets separate. Personal assets of the shareholders are not available to the creditors of the corporation. One exception would be where shareholders are required to give personal guarantees to banks, for instance.

2.      Deferral of taxes. Most small Canadian corporations are taxed at a  low rate of 15.5 % on the first $ 500,000 of active business income whereas individual tax rates can be as high as 46%. The low rate of tax provides the business with the opportunity to defer taxes until the funds are withdrawn from the corporation. The corporation has the incentive to retain surplus funds, for growing its business.

A corporation can also deduct accrued salaries or bonuses in its fiscal year even though paid out after the year end provided that payment is made no later that 179 days after the year end– corporate taxes are thus deferred to the following year.

3.      A $750,000 capital gains exemption is available on the sale of the qualified small business corporation shares.

4.   Different share classes may allow you to split income with family members, thereby reducing your tax burden. 

Drawbacks

1.       The costs of setting up a corporation and of preparing financial statements and tax returns

2.      Losses are trapped in the corporation and can only set used to offset future income from the corporation. They are not available for setoff against your personal income.

The general rule is not to incorporate until the business is profitable. You should always seek professional advice before you incorporate.

Retail Sales Tax on Insurance Premiums Post HST (Ontario Canada )

We have had several inquiries from clients regarding the application of the Retail Sales Tax since the implementation of the Harmonized Sales Tax (HST) in Ontario, Canada.

There is some confusion regarding Insurance Premiums which still attract sales tax at varying rates.  To put it simply, the Retail Sales Tax remains in effect and is, in fact unchanged, despite the implementation of the HST in July of 2010 in Ontario.  So, if RST applied prior to the implementation of HST, then it still applies currently.  However, Retails Sales Tax on insurance premiums is not part of the HST tax process and CAN NOT be used for Input Tax Credits for HST.

For more detailed information on this and other tax related matters, please visit our website at

www.liwanpo.com