For those of you with personal businesses that are growing, it may come to the point where you will want to incorporate. There are numerous benefits of setting up a private corporation for your small business, among them include:
- Litigation protection.
- Lower business income tax.
- The ability to sell your business up to $750k tax free ($1.5 million tax free if joint ownership with spouse)
- The added ease of selling/transferring your business if/when the time comes.
The above benefits are explained in detail in the post about whether or not you should incorporate your business.
Lets talk more about number 2, the lower business income tax. As a side business, many people believe that incorporating will result in a big tax break. This is true for the business income only. Once the money is withdrawn in the form of salary or dividends, it works out to be about the same as if the income was earned in your personal hands. As a side business though, the largest benefit of corporations with regards to taxation is tax deferral and the ability to keep more of business income out of the government hands initially so that it can grow over time.
How low is the small business private corporation tax rate? According to Ernst and Young, here are the 2008 private corporate tax rates sorted by province (federal and provincial combined):
|Province||Tax Rate on <= $400k income/yr
||Tax Rate on > $400k income/yr
As mentioned above, these low income tax rates are great if company earnings are kept within the business accounts and not withdrawn. It allows low taxation and the money can be invested in the markets.
Tomorrow we’ll go through a couple of corporate tax scenarios to see if there is a tax efficient way to withdraw corporate income.
Please note that i’m not an accountant or tax professional. Use the information above at your own risk.