How to Setup a Corporation in Canada

It’s been a long time coming, but I finally overcame procrastination and put my online business under a corporation. As it’s been mentioned before, incorporating has many advantages for a small business such as:

  1. Tax deferral
  2. Optimized family tax planning via dividend sprinkling
  3. Capital gains exemption should the business be sold
  4. Litigation protection

These benefits come at a cost however, which is why the cash flow needs to justify the added cost of a corporation. For us, the added cost was well worth the value a corporation provides.

What are the added costs?

  1. Cost of incorporation – If you do it online, it may only cost around $300 or so.  However, I had a lawyer incorporate for me which ended up being around $1000 after it was all said and done.
  2. Cost of an Accountant – From the quotes that I’ve received, a simple corporation should cost about $800-$1000 to file every year.  However, to file the small business in previous years, the cost was around $200 anyways, so the net cost is around $600-$800 (which is tax deductible).

The tax efficiency of a corporation (if setup correctly), will pay for the added fees many times over.

So lets get into the process of setting up a corporation. I won’t get into the nitty gritty details, but here are some things to keep in mind:

  1. Federal or Provincial – First you need to decide if you want to federally or provincially incorporate.  A federal incorporation will give your company better name protection and the ability for your company to be located in any province (inter provincial incorporation is required if you move locations which has an added cost).  However, more paper work is required.  A provincial incorporation has a bit less paperwork to be filed and is fine for a company that doesn’t plan to move.
  2. Company Name – As mentioned above, you’ll need to come up with a unique name for your company. For a federal incorporation, the name will have to be unique against a larger database than a provincial incorporation.  Note as well that if you have an online business, the domain name should be something to keep in mind.
  3. Share structure – If you have a family, decide how you want to structure your company share structure.  Do you want your spouse to have voting shares or just non voting?  Do you want separate classes of shares for dividend sprinkling?  Common or preferred?  An accountant can really help arrange your share structure to be the most tax efficient.
  4. Registration – Decide how you are going to register your incorporation.  Are you going to do it yourself, online or hire a lawyer?  For the most simple of incorporation’s, it is fairly straight forward to complete the corporation online.  However, if you want a more complex share structure, then a lawyer is recommended.
  5. End of Year – After the incorporation has completed, you’ll need to decide the year end of the corporation.  It may be instinctual to choose Dec 31, but that may not be the best tax choice for all companies.  For example, one strategy is to choose a year end early in the first quarter and pay a bonus shareholders early in the new year.  That way the bonus can be held tax free for a year by the shareholder, while claiming it as a company expense before the approaching year end (Thanks to Thicken My Wallet for the idea).

There you have it, a brief summary of some of the considerations when incorporating your small business.  As this article is meant to be a starting point, I highly suggest that you consult a qualified accountant and lawyer to help you incorporate properly.

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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8chocolate
11 years ago

I’m right in the middle of launching an online business and wondered about the federal and provincial incorporating. Wouldn’t an online business want to incorporate federally to protect its name etc since they are selling to all of Canada and not just within their province?

Otherwise could someone have a biz with the same name in another province?

Stan
12 years ago

I’m not so sure incorporation is such a slam-dunk, unless business income is somewhat significant ($100K a year seems like a reasonable threshold). There is more paperwork, and most need the services of an accountant. If you run a business, you don’t necessarily need to dividend “sprinkle” — just hire your significant other to do work on your behalf and pay them a reasonable amount for their work. The deductions are very similar to the ones afforded a non incorporated business. Also, don’t forget that dividend income from a corporation doesn’t provide any RRSP room, as opposed to regular income (salary), and isn’t taxed as favourably as dividends from large corporations. There are however more advanced strategies that allow one to create a retirement savings plan within a corporation. Finally, if the owner needs to withdraw most of the income every year for personal use, the tax advantages become even slimmer. So yes, there are significant advantages, but I believe the size of business and its income have a great deal to do with it. Small time operators shouldn’t bother.

Susan Mladenovich, CMA
12 years ago

Ethan,

I am an accountant with lots of consultants as clients. Before you think about incorporating, you need to be familiar (or have an accountant who is familiar with) the rules surrounding personal service businesses. I also call this the “incorporated sole proprietor”. CRA has special rules about this and basically eliminate the tax advantages of incorporation if you fall into this classification. And they may also snag you under GAAR (General Anti Avoidance Rules) which is the rule by which they can disallow things if the only reason you have done something is to avoid taxes. So be careful.

The general guideline for incorporating for tax reasons is when you make more than you need to live on. If you just take the money out that goes in, there are really no tax advantages.

Susan Mladenovich, CMA

Marquelle
12 years ago

So are expenses tax deductible for non-incorporated businesses?

Tax Guy
12 years ago

@ Jack:

I normally go by these rules of thumb. Unless you have creditor worries or othe rliability concerns, before you incorporate, your business should be generating a profit, and should be generating enough profit to cover the additional administrative fees.

If the business is operating at a loss, don’t incorporate because you can use those business losses aginst income.

Kathryn
12 years ago

Michael: I was going to ask the same question. At what point do the advantages outweigh the fees involved?

Michael - The Fat Loss Authority
12 years ago

Interesting post.
What’s the earnings threshold for online businesses to go the corporation route, specifically here in Canada?

Mike

Jack
12 years ago

Hey FT,
I’m wondering what criteria you’re going to use to choose your accountant? I’m currently doing my articling for my chartered accountant designation and have worked for a firm for work terms in university and now full time while going through the program. I’ll fill you in on a few “behind the scenes” aspects of CA firms.

I’m assuming that for $800 you’re just getting a compilation done which will produce a basic set of “Notice to Reader” statements (usually no good for a bank if your bank ever wants to see financial statements since they provide no assurance) and a T2 corporate income tax return. Your contact in the firm will no doubt be a partner or senior manager, but your actual file will probably be handled by a co-op student and since it’s new and probably not too complicated most likely an inexperienced co-op (kind of like how simple medical procedures are often performed by med students). I’m not going to lie to you – when I first started as a co-op, I was beyond stupid. It WILL be reviewed by someone more experienced, but you might like to know who’s taking the first crack at it.

If you are paying out dividends/salary from your corp you’ll also have to budget for T4/T5 preparation by your accountant which is usually separate from financial statement prep costs (they are at my firm).

used tires
12 years ago

One day I hope to be able to have my own corporation, it sounds like alot of work, but at the same time it sounds like alot of fun too, especially because I can become a CEO hehe. Off course it is just a title name, but it is still cool.

Till then,

Jean