The purpose of this article is to outlines some factors that will make it favourable for an individual who is self-employed to incorporate his/her business. (If you own real estate, please note that only some of the information would be relevant.)
- 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 $100,000 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 $25,000 is taxed at 13% for BC’s active business corporate rate versus the personal marginal tax rate of 38% in BC (effective 2016).However, you should also take into consideration of RRSP and TFSA, which may reduce the benefit of incorporation.
- As a self-employed individual, you have to pay both employer and employee’s portion of CPP (a payroll tax). The 2017 rate is 9.9% up to $5,128. 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 up to $5,128 and invest it into something else. A qualified investment advisor should be consulted in all investment decisions.
- If you have a spouse, children over 18 years old or a close-family member that needs your financial support, then incorporation would allow for income splitting. That is, corporate dividends could be paid to shareholders instead of using your after-tax personal cash to pay them.
- If you want to protect your personal assets from your business operations, then incorporation may limit your legal liability. A lawyer should be consulted for all legal advice.
- If you want to sell your business eventually, selling the shares of your corporation may qualify you for the Lifetime Capital Gain Exemption, which is at $824,176 as of 2016 (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’re still getting a good deal.)
Contact us today for a free consultation.