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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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22 Comments

  1. M Hawk on September 8, 2009 at 10:30 am

    Pick and choose your accountant wisely. My partner’s business is incorporated, and his accountant is an absolute genius. She saves us several grand a year in taxes, since there are numerous ways you can adjust the income between personal and business for tax reasons.

    Taking her out to lunch a couple times and treating her well also doesn’t hurt.

  2. Thicken My Wallet on September 8, 2009 at 12:27 pm

    Congrats on the move. Thanks for the mention.

  3. Ms Save Money on September 8, 2009 at 12:53 pm

    Great article – I would eventually like to create my own company one day.

    Anyway, I think it would be nice to read about bringing a company public – anyone have experience with this?

  4. The Financial Blogger on September 8, 2009 at 1:09 pm

    This is a great move!

    I have incorporated my websites last year and I am saving a lot of money!

    have you though of registering for GST? you can get checks from Gov since most of your income is tax free but your expenses may be subject to GST ;-)

    Canadian tax laws are made for corporations ;-D

  5. Four Pillars on September 8, 2009 at 2:15 pm

    I’ve looked into this but I don’t feel it is a worthwhile move for me at this time.

    I’m in a high tax bracket but part of the business income gets paid to my wife (#1 employee!) who is a stay-at-home mom and therefore ends up paying low income taxes. I also have a lot of rrsp room so any income I take can be put into rrsps.

    Bottom line is I don’t think incorporating will save me any money. Once my rrsp room is used up and when/if my wife goes back to work then it might make more sense.

  6. Northern Alex on September 8, 2009 at 2:40 pm

    Congrats to this move, FT! I am interested to read more in the next weeks about your further steps and actions. So far I wasn’t considering it, but my accountant mentioned it to me too….

  7. ethan on September 8, 2009 at 2:48 pm

    Hi, interesting idea. Is there a way to set this up so that I can share my income with my spouse ? I work as an engineer and I am the sole income earner in the family, my wife takes care of the kids. I think I may be able to convince my employer to change my status to contractor, once I did that do you think I may be able to make my own corporation (providing my engineering expertise) to my current employer and then some how give dividends to my spouse so that we can effectively be income splitting ?

    • FrugalTrader on September 8, 2009 at 2:50 pm

      ethan, in theory, you could have your wife as a shareholder setup with dividend sprinkling in mind. However, you would have to double check with an accountant regarding the rules behind being a contractor within a corp.

  8. Retired at 31 on September 8, 2009 at 3:00 pm

    A year end within the last 6 months of the calendar can also be advantageous. It will permit you to push wages payable into the next personal tax year.

    Have you ever disclosed revenues associated with the blog? Rules of thumb vary, but I’ve oft heard that <100K in revenue isn't worth the incorporation route….

  9. HalfHourEarly on September 8, 2009 at 4:46 pm

    Ethan

    I previously changed from employer to contractor and there can be significant benefits. Dividend sprinkling can be one, as FT has metioned. There are also options such as corporation-held life insurance which may work for you. While there are tax advantages, each individual should weigh out the costs of incorpration as well. For example, as a sole earner, you will have to pay for private healthcare, insurance, you don’t get paid on holidays or vacation, etc. And it is worth doing the math up front, if only to learn where you should be focusing your “frugal eye” in your new life.

    For me it made sense for many reasons. Having a good “tax” accountant helps a lot (one that can advise you on what you should do and not what you could have done).

    This is a great site. I hope to continue to learn from the bright people here and maybe even contribute a thing or two.

    HalfHourEarly

  10. used tires on September 8, 2009 at 7:49 pm

    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

  11. Jack on September 8, 2009 at 8:24 pm

    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).

  12. FrugalTrader on September 8, 2009 at 8:53 pm

    Jack, I know a CA who has done my business tax preparation in previous years. For me, I look for someone with business and tax strategy experience. Not just someone who knows the rules, but someone who can apply them to minimize my tax owed.

  13. Michael - The Fat Loss Authority on September 8, 2009 at 11:55 pm

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

    Mike

  14. Kathryn on September 9, 2009 at 12:22 am

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

    • FrugalTrader on September 9, 2009 at 8:27 am

      I’m not sure there is a hard and fast rule of thumb as other factors such as liability protection need to be weighed. However, in terms of simply dollars and cents, the cost of an annual accountant, initial setup and additional bank fees (more on this later) need to be covered (about $1k/year). For us, the tax savings (via div sprinkling) and liability protection made it an easy decision.

  15. Tax Guy on September 9, 2009 at 5:20 pm

    @ 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.

  16. Marquelle on September 9, 2009 at 7:26 pm

    So are expenses tax deductible for non-incorporated businesses?

    • FrugalTrader on September 9, 2009 at 9:26 pm

      Marquelle, providing that the expense was for business, then yes, business expenses are tax deductible for sole proprietors.

  17. Susan Mladenovich, CMA on September 9, 2009 at 10:03 pm

    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

  18. Stan on September 10, 2009 at 11:22 pm

    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.

  19. 8chocolate on October 23, 2009 at 3:14 pm

    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?

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