Formation of New Corporation
Like other parts of the world, a person can earn money in Canada under two broad capacities. First, by working as an employee under a firm or a business and second, by self-employment. As a self-employed person, there are two choices – one is to do business as an unincorporated entity and other is to incorporate one’s own business
Read MoreFollowing are the advantages of incorporating a business:
- Low tax rate to Canadian controlled Private Corporations on their active business income. As per the current provisions CCPC are required to pay taxes at 12.5% rate up to first $500,000 income if they are operating in Ontario, against the 46.43% which are applicable to individuals.
- Any business liability which arises out of business transaction for which no personal guarantee has been given does not falls on the personal Assets of the business owner.
- This structure can be effectively used for succession planning and estate planning purpose.
- The other main tax advantage to incorporating a small business is the ability to claim the $800000 capital gains exemption upon the sale of business. The complex rules provide, in effect, that to claim the exemption the shares must be of a Canadian-controlled Private Corporation, at least 90% of the assets of which are used in an active business continued in Canada, or a holding company which owns such shares. Where the shares qualify, the owner can sell them and the first $800,000 of capital gains are exempt from tax.
Following are the disadvantages of incorporating a business:
Losses trapped:
Any business which is not operating at the breakeven point should not incorporate from a tax point of view, although it may be sensible to incorporate when considering limiting liability. A loss earned in a corporation cannot be transferred to its shareholders. Conversely, owners of an unincorporated business would be able to utilize losses which they incurred against other sources of income or against future earnings. Losses that arise in a corporation can only be offset against earnings in that corporation.
Double taxation:
A potential double taxation trap exists if an active business earns too much profit. Corporate profits from active business income more than $500,000 per year are taxed at full corporate rates. Integration of the personal and corporate tax systems do not work at that rate, resulting in an element of double taxation. Therefore, all income more than $500000 should usually be paid out of the corporation by way of salary or bonus to avoid this double taxation trap. If the corporation require the funds for operational purposes, the income can be paid to the shareholder and then loaned back to the corporation. The salary receipt is, however, taxable to the shareholder.
Other Disadvantages:
A corporation is also subject to strict rules governing the taxation of shareholder benefits, such as shareholder loans or the use of a company car.
Finally, the transfer of the unincorporated business or partnership to a corporation will be a taxable transaction unless a rollover agreement is made, and the appropriate election is filed with Revenue Canada. Provided such an election is made, the transaction can be free from any immediate adverse tax implication
After evaluating the advantages and disadvantages, the benefits of corporation overturn the disadvantages. The only situation when the corporation is not advisable is at the time of starting a business, when in the initial period, expenses are more than the income and the business is incurring economic loss. Such loss can be off set against other personal income and the overall tax liability can be reduced.
We help our clients to have the correct business structure and form the corporation along with other corporate records.
