Should I incorporate?

After All, It’s Your Money

Incorporating your business could be a way of keeping more of your hard-earned money where it belongs: in your pocket.

As a mid- to long-term strategy, incorporation can be very effective in deferring taxes and producing tax savings.But incorporation is about more than just number-crunching. How much personal income do you have from other sources? What is your personal commitment to contracting? What are your gross contracting revenues less expenses? What are your lifestyle spending patterns?

Nothing can replace the advice of a good chartered accountant, of course, each case is different and the tax laws and rates differ from province to province. But for those who do choose to incorporate, there are some generally accepted benefits.

Lower Your Tax Rate
The top marginal personal income tax rates run from approximately 39 to 48.25 percent, depending on the province. When earnings are retained within a corporation, however, they are taxed at a rate as low as 11% – again, depending on the province.

Borrowing from the Corporation
Should you require it, you may be able to borrow money from the corporation. From a tax perspective, this is a very effective way to get access to those retained earnings.

Income Splitting
Corporations can also split its income with spouses or with children over the age of 18. This can be done on a before-tax and after-tax basis.

Dividends
Dividends are funds paid out by the corporation after it has paid the corporate tax. To contractors, dividends are an attractive way to structure retirement or sabbatical income because, assuming you have no other income at the time, you and your spouse can each receive as much as $30,000 each before the tax payable exceeds the tax credits.

It’s About More Than Money
Saving money is not the only reason you may want to incorporate your business, incorporation also sends an important signal to both the Canada Revenue Agency (CRA) as well as your clients: you are not an employee—you are serious about self-employment.

Why Is It an Important Signal to Send?

To the CRA: Imagine that CRA deems you an employee. Now imagine the reaction of your client when faced with an estimated $3,000 annual bill for Employment Insurance and Canada Pension Plan premiums that should have been submitted by the company on your behalf every year.

To your clients: Some clients won’t deal with unincorporated contractors. It’s as simple as that. Incorporation tells the client that you are a professional who is committed to long-term contracting.

Personal Protection
Outside of tax issues, this is one of the most attractive reasons to consider incorporating.
Unlike sole proprietors or partners in a general partnership, shareholders of a corporation are not subject to the risks associated with bankruptcy or legal action. In fact, some entrepreneurs would not consider self-employment without this protection.

Means to an End
Incorporation may also be used as a means to other business activities that may include software-product development or hiring other contractors or employees. As well, the corporation is more likely than an individual to qualify for government assistance. This may include access to government programs related to job creation or research and development tax credits, for example.

Incorporating Is Easier Than You Think
If there are so many benefits, why doesn’t everyone incorporate? As mentioned previously, your income should be at a certain level for incorporation to begin to make sense. But one of the main reasons contractors avoid incorporation is the belief that the process is long, expensive and labour-intensive. Nothing could be farther from the truth. Simple incorporation of a numbered company can cost less than $1,000 and take fewer than 10 working days. And your chartered accountant and legal advisor can make all the arrangements for you.

Is It for You?
You are the only person who can answer that. Why not make an appointment to see your chartered accountant or legal advisor? It may be the best call you ever made.

The above information does not cover the entire spectrum of issues related to this topic. Some issues could be quite complicated and should be discussed with professional advisors. The above information is for informational purposes only and is not intended to be used as specific legal or tax advice.