The Benefits Of Incorporation
There may be many advantages to incorporation versus a Sole Proprietor or Partnership: advantages that many people do not consider when registering their business. These essentially relate to the fact that the corporation is a legal entity separate from you personally – even though you may own 100% of the shares. Some of these benefits are explained in the summarized below:
- Limited liability re. debts and other obligations
- Easier to borrow and raise capital
- Low tax rates up to $500K
- Income deferral to maximize tax savings
- Transferable (saleable) ownership. “Perpetual succession”
- Income splitting among employees
Reporting Income And Expenses
Usually you want to accelerate expenses and delay income if possible when you have high income in that year. This results in lowering your taxable income in that year when your income is high tax rates may be higher, and the taxable benefit of a deduction will be higher. If you expect higher income in the next taxation year, you would want to do the opposite: i.e. accelerate income (to record all possible income this year when your income and tax rates should be lower) and defer expenses if possible to when income and tax rates are higher.
Accelerating expenses involves spending at the end of the year rather than in the next year. If you are going to purchase new office equipment early in the year, consider buying it before the year – end now so that you can depreciate it this year and therefore get the tax deduction and tax savings this year.
If you can delay starting projects until the next fiscal year, do so. That way the income won’t be taxed until the next taxation year and you won’t pay tax on it until the year after that. Income that has already been earned cannot be deferred. Again, income deferral will depend on your tax situation.
If you are a corporation and have corporate income tax owing, taxes must usually be paid within two months after the fiscal year - end. Canadian-controlled-private corporations that are claiming the Small Business Deduction have three months to pay income taxes.
Sole proprietorships and partnerships must declare business income on their T1 Personal Income Tax Return. You should pay any income tax owing by April 30th, assuming that your business's fiscal year ended on December 31.
For salaries and bonuses to be deductible, they must be accrued before year-end and paid within 6 months. Source deductions and payroll taxes must be remitted on time.
Eligible dividends are important to understand - be sure to only use dividends that qualify. Payment of dividends and bonuses may impact your ability to claim the $750,000 lifetime capital gains exemption when the business is sold.
Determine the salary-dividend mix that minimizes overall taxes for the corporation and the relevant individuals. Consider marginal personal tax rates, the corporation's tax rate, RRSP contribution room, provincial health and/or payroll taxes, CPP contributions and other personal deductions and credits.
Shareholder loans must be repaid from your corporation no later than one tax year after the end of the tax year in which the amount was borrowed.
The CCA rate of 50% declining balance for eligible equipment has been extended for equipment acquired before 2014. It was due to decline back to 30% but this is delayed given economic realities. If possible, always purchase equipment before year-end to immediately gain CCA deductions.
Income splitting is a common and effective way to reduce taxes. Here, you are paying salaries to family members who work in the business – of course, this must be fair and reasonable. This enables others benefits such as allowing the recipients to claim various expenses such as child-care expenses and to benefit from RRSP contributions. Consider income-splitting with family members in lower tax brackets to fully capitalize on their lower rates.
Hiring credit for small business
Credit of up to $1,000 if your business's employment insurance premiums increased in 2011 and were $10,000 or less in 2010.
