Tax season is less stressful if you know what you're doing – and it can even be gratifying if you receive a substantial refund. If you're a sole proprietor of a company that generates a substantial profit, you should consider the potential tax advantages associated with incorporation.
Incorporation is especially worthwhile if you are looking to grow your business, increase your inventory or purchase assets. One of the best reasons to incorporate is to limit your own liability and keep your personal assets safe – but there are several tax advantages that will provide you with larger tax refunds and savings you can then use to reinvest in your business.
First and foremost, Canadian-controlled private corporations (CCPC) are eligible for the small business deduction, which significantly reduces corporate tax rates and is one of the most beneficial income tax deductions available to Canadian corporations.
As a sole proprietor, you are paid the same way as an employee; incorporating your business provides you with the option of paying yourself through company dividends instead of a salary (or a combination of both). Receiving income through dividends is the better option for many incorporated business owners as it eliminates the need to make the payroll deductions you would with a salary (such as CPP) – and you can receive a dividend tax credit.
If incorporated, your spouse and other family members can become shareholders in your corporation, providing you with the flexibility to split income among them. You can then redistribute income from family members in higher tax brackets to those in lower tax brackets, who will therefore be taxed at a lower rate. Additionally, you may be able to receive deductible benefits as an employee of your corporation, such as: automobile expenses, an individual pension plan, and health care premiums.
Consider this: selling your business as a corporation is much easier than selling it as a sole proprietorship, and if you decide to sell your own shares, incorporation allows you to take advantage of the $800,000 lifetime capital gains exemption, through which you can shelter a portion of the (or all) capital gains.
With an incorporated business, you can also decide to defer a portion of your tax payment until a later date – perhaps when you are in a lower tax bracket, or when the tax rate decreases.
An accountant can help you assess whether incorporation will provide you with long-term benefits and savings. To find a recommended accounting professional in your area, this directory can help. Although there are extra administration costs (and time) associated with incorporation, the tax advantages can be significant if your company is generating enough revenue.
One drawback to incorporation is having to file two tax returns – one for your personal income and one for your business. Financial management software greatly improves both tax-filing processes, as your financial information is already in one place, which can easily be exported into tax preparation software and securely submitted through NETFILE. Tax preparation software can also help you analyze your business to find and claim hidden deductions common to your industry.
If you need personalized insight into your company's taxes, or don't feel comfortable filing them yourself for the first time, seek the advice of a professional accountant who can guide you through the process and provide counsel that's unique to your business.