Incorporating a business in Canada has many benefits and tax is one of the biggest. Going from a sole proprietorship to a corporation affects your tax liability in many ways. Consult with a qualified corporate tax accountant Ottawa will help you make informed decisions to optimize your tax and manage your obligations.
Lower Corporate Tax Rates
One of the biggest tax advantages of incorporating in Canada is lower corporate tax rates. Individuals have personal tax rates that increase with income, corporations have a flat rate that is generally lower. Small businesses that are Canadian-Controlled Private Corporations (CCPCs) get an even lower rate on the first $500,000 of active business income through the Small Business Deduction (SBD). This deduction allows many incorporated small businesses to reduce their tax and keep more earnings to reinvest in the business.
Tax Deferral
Incorporating your business also gives you tax deferral. Unlike sole proprietors, corporate owners don’t have to pay personal taxes on all the income earned by the corporation right away. They can leave some of the income in the company where it’s taxed at a lower corporate rate. This gives them flexibility to pull income out in years when their personal tax rate is lower or when they need funds for specific purposes. By deferring personal taxes, they can reduce their overall tax and plan their withdrawals.
Income Splitting
Income splitting is another benefit for incorporated businesses. Corporate owners can issue shares to family members and pay dividends to those in lower tax brackets. This reduces the overall family tax liability as income is spread among individuals who pay at lower marginal rates. However, Canadian tax laws have tightened up on this benefit with the Tax on Split Income (TOSI) rules. Only certain family members, such as those actively working in the business or 65 and older may qualify. Consult with a corporate tax accountant Calgary to ensure compliance and to see if income splitting can work for you.
Deductions and Additional Expense Claims
Incorporation gives you access to more deductible expenses. Corporations can claim expenses like salaries, rent, office supplies and other operating costs. Incorporated businesses can also offer tax deductible retirement plans and other benefits to employees including the business owner, which reduces the business’s taxable income. These deductions are especially valuable because they reduce the amount of income subject to corporate tax and more savings.
Capital Gains
The Lifetime Capital Gains Exemption (LCGE) is a big tax benefit for incorporated business owners. This exemption allows eligible CCPC shareholders to claim a tax free portion of the capital gains when selling shares of their corporation. To qualify, you must meet certain criteria including holding shares for a certain period and the corporation must be a CCPC.
Double Taxation
Incorporation also brings the possibility of double taxation. This is when the corporation pays taxes on its income and the owner is taxed again when that income is distributed as dividends. However, the Canadian tax system provides a dividend tax credit to reduce the impact of double taxation. Planning is key, such as when and how to pay dividends or salaries to minimize this burden.
Conclusion
Incorporating in Canada gives you tax benefits, from lower corporate rates to income splitting and capital gains exemptions. It requires careful planning to navigate TOSI rules and double taxation. Working with a corporate tax accountant is key to maximizing the benefits and to ensure compliance with Canadian tax laws to save you more and protect your assets.
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