Physiotherapist Charlotte Anderson always knew she wanted to start her own business. In 2013, she launched Alpha Health Services in a 500-square-foot office in Toronto.
Three years later, her company had expanded to 2,000 square feet in a nicer building in Toronto with a receptionist, a couple of satellite locations and seven contractors, including other physiotherapists, massage therapists and a dietician.
Ms. Anderson, 28, says part of the reason she was able to build her business was because of the lower taxes paid as a result of incorporating her company.
In Ontario, for example, an incorporated business pays a tax rate of 15 per cent on the first $500,000 of income each year, thanks to the small business tax deduction, and 26.5 per cent for anything beyond that. Rates vary by province.
If Ms. Anderson had stuck with a sole proprietorship business model, she would have paid the personal income tax rate on profits from the business. In Ontario, she could have been faced with rates of more than 50 per cent.
"It meant I had more funds to work with to invest back in the business, to help it grow," Ms. Anderson says.
She used the money saved to buy more equipment and do more marketing, including advertising and sponsoring local amateur sports teams.
A lower tax rate is one of the key advantages to incorporating a business. However, accountants make the distinction that the taxes aren't being saved, but instead deferred. That's because, when the money is taken out of the corporation for personal use, through salary or dividends, the individual winds up paying approximately the same tax rate as if they were a sole proprietor. It's known as the "theory of integration" in the Canadian tax system.
Most accountants recommend business owners incorporate if they can afford to leave money in the company longer-term with the goal of watching the value of the assets grow.
"One of the main benefits of incorporating is that you can benefit from a significant tax deferral if the owner/manager doesn't need all of the income for personal living purposes," says Aaron Schechter, a Toronto-based tax partner at accountants Crowe Soberman.
Another tax advantage comes when it's time to sell the business. The shares of most Canadian private corporations are eligible for a lifetime capital-gains exemption. In 2016, that exemption amounts to the first $824,176 of capital gains from personal income tax, per shareholder. If the business were a sole proprietorship, any gain from the sale of a private corporation would be taxed.
Another advantage to incorporating is the opportunity to use income splitting among family members, says Cheyna Conder, a chartered professional accountant based in Richmond, B.C. She says the company needs to be structured to include the spouse as a shareholder, and set up in a way so that each person takes dividends from the company.
"If one spouse makes more money, you can income-split. Over all, both spouses will be in a lower income-tax bracket," Ms. Conder says.
Daniel Dunsford, a plumber and owner of Vancouver-based Pristine Plumbing & Drainage Ltd., incorporated his company in January after going out on his own. He employs his wife to help with the corporation's accounting and bookkeeping.
The tax deferral benefit allows him to invest more money into the business, which he uses to buy new equipment. "Plumbing equipment is quite expensive," says Mr. Dunsford, 29. "Every little bit really helps."
Another advantage of incorporation, beyond taxes, is the ability to shift liability to the corporation and away from the individual. Incorporating can also add credibility; some larger companies require contractors to be incorporated before they can be hired.
The disadvantages to incorporation are increased paperwork and administration. That includes the one-time cost to set up the corporation, including accounting and legal fees, which can run to more than $1,000. Owners also have to file two tax returns, a personal one and a more complicated one for the business.
"In the beginning it was overwhelming," says Ms. Anderson of incorporation. "I thought, 'Why am I spending this money when I'm not making any money?'" Still, she said, the process forced her to plan for future growth of the company, and made it more tax efficient.
If she had to do it over again, Ms. Anderson says she would have sought more advice about what it means to be incorporated, including legal advice, even though she has no regrets.
"As you grow, and I think every small business wants to grow into a bigger business, you really want to understand the implications of incorporation and whether it's right for you."