Loading Website ...

Questions & AnswersShould I incorporate my businessÉ
Anonymous asked 2 years ago

I heard that if I incorporate my business, I’ll pay a lot less tax. Is this true?

1 Answers
Phil HoganPhil Hogan Staff answered 2 years ago

Not necessarily. It’s true that you have other options when you incorporate your business in terms of income splitting, and overall lower rates for corporate tax on income than compared to individual tax rates.

However generally speaking, for example, if you’re going to earn $100,000 of business income personally and pay personal tax or earn $100,000 business income in a corporation and pay corporate tax on it, and then pay a dividend of the company to yourself personally, you should pay the same amount of tax (generally speaking).

With that being said, there are some advantages for tax purposes to incorporating. The first being income splitting. If you earn business income in a corporation, you could split that income with, in most cases, your spouse. So if your spouse doesn’t have any income currently, and you make $200,000 in the corporation, you can split $100,000 to him or her, and then you could be taxed on the other $100,000. That essentially has lowered your overall tax rate. Because without income splitting you have $200,000 on income you would have to pay taxes yourself. Another advantage is that you get to defer taxes at a very low rate of corporate tax until you pull money out of a corporation. If you earned $200,000 in a corporation, and you only withdraw a $100,000 from the corporation in 1 year, you’ll pay a very low rate in tax on the $100,000 that has been left in the corporation, about 12% or 13%. And you’ll only pay personally tax on that amount until you actually withdraw from the company.

There’s another opportunity too, if you were to sell the shares of your small business, you currently have a $800,000 Capital Gains Exemption. So if in the future you’re able to sell the shares of your small business corporation, you could do so tax free, which wouldn’t be available to you as a sole proprietorship. There’s also the added benefits of legal protection and limited liability under incorporation.

If you want to talk more about incorporation and the potential benefits to you and your family, please give me a call at 250-381-2400 or email me at phil@hutcheson.ca

Your Answer