To incorporate, or not to incorporate? It’s a timely question, considering recent corporate tax reforms. However, it’s also a question that existing business owners and aspiring business builders should think about post tax season as they discuss business growth planning with their tax specialists. It’s an important strategy that can save thousands of dollars that helps build family wealth over the long run.
For many business owners, this is a daunting decision because of the complexity of the tax rules. There are many questions to consider, such as:
Some of these structural questions are well answered in Knowledge Bureau’s new certificate course, Business Law and Contracts which is found in the MFA™-Executive Business Growth Specialist program. The corporate tax courses available including Corporate Income Tax Fundamentals and Tax Planning for Incorporated Professionals will also help to explain the integration between the personal and corporate tax systems, so that business owners can better plan compensation options now and in retirement.
Here’s a look at some of the issues every business owner should understand when considering incorporation:
As you can see, while your day-to-day activities are not much affected by your business structure, your legal liability and your tax obligations are. Treating the planning around the appropriate business structure simply as a “technicality” could lead to unintended consequences, especially as it relates to complicated taxation rules.
Business owners who make financial decisions throughout the year, for example paying dividends to family members who are inactive shareholders, can doom the personal tax consequences to the expensive new Tax on Split Income rules. In another example, paying dividends rather than salary will be at the expense of making Canada Pension Plan contributions and creating unused RRSP room, which could have implications down the line in retirement planning. Using a Real Wealth Management model, the best decision is to take a multi-stakeholder approach to personal corporate tax planning.
Tax rates are also significantly different for a corporation versus an unincorporated proprietorship. While an individual must include and pay tax on all profits of the proprietorship at their marginal tax rates, a corporation generally pays a flat rate of tax, depending on source of income.
Active business income earned a corporation that qualifies for the Small Business Deduction will be subject to tax at a lower rate. But if the passive investment income earned on retained earnings in a company are significant - $50,000 or more - that small business deduction can be clawed back, with the result that higher general tax rates are applied.
The best way to protect yourself and your business from unintended tax consequences is to understand the legal framework under which businesses operate and what options you have for optimum owner-manager and family tax planning . If you want to learn more, enrol and start online now: completion of the Business Law and Contracts course provides credits towards the MFA™ – Executive Business Growth Specialist program. Or, get a sneak peek by taking a free trial.
Additional educational resources: Hone your leadership skills, and network in the company of fellow business owners at Knowledge Bureau’s second annual Business Builder Retreat. Taking place this November in Puerto Vallarta, Mexico.
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