The purpose of this article is to outlines some factors that may make it favourable for an individual who is self-employed to incorporate their business.
If your business generates a net profit that is significantly more than your personal cash needs, then incorporation would allow for a tax deferral. For example, say your business net profit is $140,000 per year, but you only need $55,000 for personal spending. You could take out a salary of $75,000 to cover personal cash needs as well as the income and payroll taxes. The remaining $65,000 is taxed at 11% for BC’s active business corporate rate, which is much lower than the personal marginal tax rates of 28% to 40% (as of 2023 tax year). However, you should also take into consideration of RRSP and other personal goals (e.g. buying a property to live), which may reduce the benefit of incorporation.
As a self-employed individual, you have to pay both employer and employee’s portion of CPP, which is over $8,000. Incorporation would allow you to be paid a dividend instead of salary. A dividend is not subject to CPP, which means you could potentially save over $8,000 and invest it into something else. However, a qualified financial advisor should be consulted in such decisions.
If you want to protect your personal assets from your business operations, then incorporation may limit your legal liability. However, a lawyer should be consulted for all legal matters.
If you want to sell your business eventually, selling the shares of your corporation under certain conditions may qualify you for the Lifetime Capital Gain Exemption, which is over $1,000,000 from 2024 year onwards (and the amount is indexed for inflation). This means that any gain that is under the exemption would not be subject to income tax. (It might trigger Alternative Minimum Tax, but you can get it back as long as you have taxable income in the future.)
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