Four Advantages of Using A Company for Your Business

by | Aug 23, 2010 | Incorporation, Taxation, Uncategorized | 0 comments

Greater Cash Flows to Buy Assets or pay debt

Currently, a Canadian owned small private company in BC pays significantly lower taxes then an individual operating a non-incorporated business.  This fact is useful if you intend to buy business assets or need cash to pay down business debt.

Each $1,000 of small business income in a company will attract $135 of income taxes.  The net residual cash after taxes is $865 when income is earned in a company.

In contrast, if you operate a business personally, the tax rates range from 20% to 44%.  The range is dependent on your income level.  This means for $1,000 of income earned, you are left between $560 to $800 ($1,000 of income less taxes of $440 to $200) after taxes are paid.

A comparison of the above illustrates there is more cash available when your business income is taxed in a company.  Specifically, operating a company will leave you between $65 to $305 more cash for each $1,000 of income.  This excess cash can be used to finance asset purchases such as a building or service debt payments.

Income Splitting with dividends

If you own a business personally you cannot legitimately split income with your spouse if he/she is not involved in the business.  This means you are completely burdened with any income taxes.

However, if you operate as a company and structure your spouse as a shareholder, dividends can be legitimately used to split income.  This is permissible even if your spouse is not actively involved in the company.  For 2010 approximately $30,000 of dividends can be paid to your spouse tax free (assuming your spouse has no other income).  The tax savings can be as much as $10,000 ($30,000 dividends x 33% tax rate for dividends) per year if you are a high incomer earner.

Income Splitting with dividends to trusts

Assume you operate a small business company.  Dividends paid to you attract up to 33%  in personal taxes.  However, family trusts holding shares in your company can be utilized legitimately to funnel dividends to your spouse, or even adult children tax free in the years when they are attending university.  You can avoid up to $10,000 ($30,000 of dividends at 33% tax rate) in taxes per person annually this way.

Tax Free Sale of Your business

If you have built up a business and want to retire, the next step is to sell your business.  If you operated a business personally the profits from the sale will be taxable.  The tax rates vary depending on the type of assets you are selling.  However, the key idea is that taxes will have to be paid if you sell your business for a profit.

In contrast, if you structured your business to be a company, up to $750,000 of gain on the sale will be tax free.  Tax laws allow this on small business corporation shares that meet certain criteria.  Additionally, if you structured your spouse to be a shareholder of your company as well, he/she is entitled to a separate $750,000 exemption.

In summary operating a company has definite advantages.  Consult your advisor to determine if they apply to you.

A. Ko, CGA, CA

Editors note:  Thanks Alex for this great contribution.  Definite food for thought for people considering incorporation.

Tax Fraudsters Beware!

Written by: by Anjuli Gustafson, Sept., 2020 Over the past few months, the CRA has successfully prosecuted a number of individuals found to have committed tax fraud. In May of 2020, the CRA announced that Damien Edward Reynolds was sentenced to a conditional sentence...

Behind in your taxes? There are remedies. You can do this!

What happens when you fall behind in filing your taxes? How can you catch up if you have not filed for a few years? Gustafson Accounting wants to help you figure out how to catch up on your filings when you are behind. We know that people are busy and that things can...

Budget 2019 Tax changes of Note

The Department of Finance introduced a number of changes to the tax laws in 2019, here are some things you may need to know about the 2019 budget: Enhanced Canada Pension Plan: The Canadian Pension Plan (CPP) is gradually being enhanced as of 2019. This means that the...

The End of Tax Integration?

As many of you have no doubt read or heard by now through various media sources, the Federal Government is in the midst of proposing changes to the Canadian Income Tax Act that have been described by others as the most significant in the last 50 years. In all my years...

New Tax Measures Provide Planning Opportunity for Families

Its always nice to get good tax news to pass along, such as those impending tax changes recently announced by Government, but not yet enacted. For the first time, families will have direct access to income splitting savings that have heretofore been restricted to...

CRA cries Mea Culpa

I suppose this belongs in the category of 'we didn't need a report to tell us that', but the Canada Revenue Agency recently released an internal report that found its own communications were "poorly organized, confusing, unprofessional, unduly severe, bureaucratic,...

Never Too Late to File Your Taxes

Over the years I have helped many people to catch up on their taxes, in some cases going back the maximum allowable of ten years.  Yes, you can file tax returns as far back as 10 years and they will be accepted by the CRA. In many cases I have met people who had...

Year end is Donation time

It is year-end time again but it is not too late to make your 2012 donations. Any donation receipted by a registered Canadian charity on or before December 31 will be eligible to claim on your 2012 tax return.  If you are uncertain as to the eligibility of the charity...

Good news for new OAS Applicants

new oas rules to benefit those now turning 65

Clarity at last for US citizens in Canada that have not filed their tax returns

Fear and Uncertainty.  These two words were very representative of the general environment of US citizens in Canada that needed to catch up on US income tax return filings.  Until recently, that is. If you are a US citizen living in Canada and have not filed your US...