Corporation

A separate legal person

When you incorporate, the business stops being an extension of you. The corporation owns its bank accounts, equipment and contracts, and it owes its own debts. Shareholders own the shares, directors oversee the business, and one person can fill both roles. Because the corporation is defined by law, it can continue to exist if an owner dies or sells their shares.

You can incorporate federally or in Ontario. A federal corporation can carry on business anywhere in Canada and receives stronger name protection, while a provincial incorporation can suit a business that operates mostly in one province. Either way, you receive a business number and must file an annual return to avoid a risk of administrative dissolution.

How tax changes

The corporation pays tax on its own profit and files a T2 return within six months of its fiscal year end. Its profit is not automatically passed to you. Federally, the general net rate is 15%, and a Canadian-controlled private corporation claiming the small business deduction pays 9% on eligible income. Ontario adds its own rate on top.

Money you take out is taxed again in your hands, as salary or as dividends. So a corporation can defer personal tax only on profit that stays in it. If you withdraw everything each year, the benefit is much smaller.

An illustrative example

Suppose, for illustration, a consultant earns $120,000 of profit through a corporation and needs $70,000 to live on. The corporation pays tax on its profit and the consultant pays personal tax on the $70,000 taken out. The rest remains in the company, where it can fund equipment or a reserve. If the consultant needed all $120,000, the extra layer of tax and administration might outweigh any advantage.

What you take on

A corporation needs proper books, separate bank accounts, a year-end and corporate tax filings. Amounts moved between you and the company must be tracked carefully, and a loan from the corporation to you can have tax consequences. Limited liability generally protects shareholders’ personal assets from the company’s debts, but not if you sign a personal guarantee, and directors can be personally responsible for payroll and GST/HST amounts that were collected or withheld but not remitted. How far protection reaches depends on the facts and the law.

What to discuss with your accountant

Ask whether your profit and your spending needs justify incorporating, how you would pay yourself, and which year-end suits you. Bring your recent income, your expected personal needs and any plans to hire, borrow or bring in partners. If you already operate as a sole proprietor or partnership, ask how assets would move into the new company.