There are several tax and non-tax reasons to incorporate your business or investment portfolio; some of them are discussed below in brief:
Tax reasons of incorporating:
- Income splitting: Income from business or property can be distributed among low earning family members instead of distributing to one person paying taxes at higher rate. However, if such distribution is made to children under age 18 such income is subject to special tax at top marginal rate in the hand of the recipient.
- Change in source of income: Taxpayers who want to build funds for retirement through tax deferral mechanism they may opt for incorporating their non-registered investments. Investment income earned personally does not constitute earned income for RRSP contribution purpose. If investment income is earned through corporation and salary is paid to the owner-manager, then salary does constitute earned income for RRSP purpose. Corporation can deduct salary from income; however, salary paid to the owner-manager has to be reasonable.
- Capital gains deduction: This is available only if you dispose off the shares in a qualified small business corporation or dispose off fishing or farming property.
Non-tax reasons of incorporating:
- Limited liability: Shareholders’ liability is usually limited to their investment in shares or debt if they provide personal guarantee. However, a director of a corporation has certain liability such as payment of GST and source deductions under tax legislations.
- Ease of arranging finance: Corporation has always been a preferred vehicle for obtaining finances for the business.
- Succession of business: Succession of incorporated business is easier than unincorporated business by offering equity to outsiders or transferring the business to family members or management buy-out or effect an estate freeze, as suitable for the business owners.
- Continuous existence: Corporation is a legal entity or person separate from its owners or shareholders. Regardless of change in ownership/shareholding or death of shareholders the corporation continue owning the assets in the business or in the investment portfolio.
Cost of initial and ongoing maintenance of a corporation
There are some initial costs of incorporating such as name searching fee, government incorporation fee, and initial return filing fee, lawyer’s fee for documentation, and legal and accounting fee if transfer of assets is involved.
There are some ongoing costs of maintaining a corporation such as for minute books, annual corporate return filing, corporate tax return, and issuance of T5 slips for dividend.
Tax Accountants Toronto or Tax Accountants Scarborough can help you decide incorporating your business or investment portfolio.
- Weigh tax and non-tax reasons of incorporating carefully for your specific situation and decide before you actually incorporate your business or investment portfolio.
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