Considerations on incorporating your business or professional practice
If you have an unincorporated business or professional practice, consider incorporating to take advantage of various tax planning opportunities not otherwise afforded to unincorporated businesses.
Many provincial governing bodies allow professionals to incorporate their practice, subject to conditions of incorporation specific to their profession. Generally, professionals that can incorporate a professional practice include: Accountants, architects, attorneys, physicians, dentists, veterinarians and engineers, among others.
Some possible advantages of incorporating your business or professional practice include the following:
Limited liability
Unlike a sole proprietor or a partnership, a corporation is a separate legal entity. In certain circumstances, shareholder’s liability exposure may be limited to the amount that they have invested in the corporation, thereby reducing any risk to the shareholder’s personal assets. In the case of a professional corporation, professional liability may not be limited through the use of a corporation.
Small business deduction
A Canadian controlled private corporation (CCPC) with active business earnings generated in Canada is subject to a lower corporate tax rate on the first $500,000 of active business income. In Ontario, the combined federal and provincial corporate tax rate for 2014 is 15.5% on the first $500,000 of active business income and 26.5% on active business income above the $500,000 threshold.
Deferral of personal tax
One significant advantage of incorporating your business or professional practice is the ability to defer personal tax by retaining income in the corporation. In Ontario, the 2014 highest combined federal and provincial marginal tax rate for individuals is 49.53%. As corporate tax rates are significantly lower than the highest marginal personal tax rate, you could achieve a deferral of personal tax until such time that the income is ultimately distributed from the corporation to you personally as a dividend.
Investing pre-tax dollars
As income left in a corporation is generally subject to lower corporate tax rates, your corporation will have more after-tax funds for investing than would otherwise have been available for you to invest personally, if you earned the income directly.
Life insurance
It is often more cost effective for your corporation to be the beneficiary and owner of a life insurance policy rather than you personally. Premiums paid personally or by a corporation are generally not deductible. However, premiums paid by the corporation with dollars that are subject to a lower corporate tax rate is more cost effective, as less pre-tax income is required to fund the premiums. Insurance death benefits received by a CCPC upon the death of the insured individual may be taken out of the corporation without attracting tax.
Lifetime capital gains exemption
Where the shares of the corporation meet certain criteria, a lifetime capital gains exemption (LCGE) of $800,000 may be available if you sell your shares or transfer the shares to your children or spouse during your lifetime or upon your death. An Ontario resident that is able to utilize his or her $800,000 LCGE on the disposition or transfer of qualifying shares will realize capital gains tax savings of up to $200,000, depending on the individual’s particular circumstances.
Income splitting
Planning opportunities may be available where dividends can be paid to your spouse, adult children or adult grandchildren, which could result in significant overall tax savings in situations where your family members are subject to a lower marginal tax rate. In Ontario, an individual with no other sources of income in 2014 can receive approximately $35,000 of non-eligible dividends and $49,000 of eligible dividends tax-free. A professional’s provincial governing body determines whether family members are permitted as shareholders of a professional corporation.
In certain circumstances, family members may be employed by the corporation and receive reasonable salaries for duties performed.
Estate planning
Incorporating your business and implementing an appropriate share structure for your corporation provides you with greater flexibility on transferring your business to family members during your lifetime or upon your death. Proper planning as such can serve to reduce capital gains taxes payable by your estate. Any restrictions by a professional corporation’s provincial governing body for the relevant profession should be considered in determining the appropriate structure for a professional corporation.
How can Collins Barrow help?
There are many factors to consider when deciding whether incorporating makes sense in your particular circumstances. Forward thinking may reduce your taxes for 2014 and future years. Contact your Collins Barrow tax advisor to explore this and other valuable tax planning opportunities.
Maria Severino, Tax Partner and Gina Pak, Tax Manager, Collins Barrow Toronto LLP