To Incorp or not to Incorp
That is the question
There is a say
if you own a business,
you can beat the tax system
you make the tax rule
and pay much less tax compare to an employee.
Is this a myth or a fact?
In today’s video,
we will explore the benefits of having a corporation
Which type of the corporation fits you
And what kind of tax advantage you have?
Hey everyone, It’s Thomas here!
Better Mindset | Better Life!
We will continue going over the book
15 secrets that taxman doesn’t want you to know.
If this is you first time here,
this channel is to learn how money works
and how you want to work with money in Canada
If you have any questions related to your finance
feel free to reach out in the comment section below
Your support will be my biggest motivation!
Let’s jump into it
Setting up a company is not as complicated as you think.
You don’t need a physical building
to call yourself a business owner.
A withholding company is merely some paper work
and a name attach to it.
And the name can be like ABC123,
a bunch of number with no meaning is ok too.
You can reg the company yourself
Although I recommend to let
your accountant and lawyer to deal with it.
There are only 2 benefits of having a corporation
for Liability and Tax purpose:
for employees, the flow of income goes like this.
First money earned,
then money get taxed then
you spend the rest of the money to food, gas, daily expenses.
On the other had,
If you are “a business owner’’
then the pattern will be like this:
money earned but you spend it first,
then the left over gets taxed.
through a corporation,
you can spend the earning
before the government gets their hands on it.
So you see why all the high income earner like
lawyer, dentists, car mechanics always have a corporation.
If your business deals with more than 1 customer,
once your income reaches to a certain level,
it’s time to consider to incorporate or not.
There are 2 ways to setup business structures in Canada
First type is the unlimited liability company.
Such as sole proprietorship, which is owned by one person,
Or a partnership which is owned by 2 or more people
Either way, the business involves you and your partner only.
All expense and income are factor into your income tax.
You are responsible for all the debts
and obligations of the business,
which also mean that in the event things did not go well,
any claim could go into your personal asset.
John runs a construction company in a sole proprietorship.
One day if he gets sued because a project that he built failed
Not only he might lose his company
and possibly everything in his asset including his house.
Partnership is similar.
If Tom and Mary decide to open a restaurant together,
if somethings happen to one side.
It affects to all the partners and possibly to their personal asset.
It’s quite scary when there is no limit on the liability.
Sole proprietorship or partnership have simple business structure,
It has a lower start up cost,
it costs less than $200 to register to the government.
The oncome and expense are attached to personal income.
So, if your business is losing money,
you can reduce your total personal income
but as the company grows,
it’s better to move it to the 2nd type which is the corporation
1. Now the liability goes to the company only
2. you have more tax advantage
and 3. it’s easier to move assets tax efficiently
if they have increase in value in the long run.
The 2nd type is the limited company.
Example will be like ABC. Ltd, 123 Corp or Inc.
The ending name doesn’t make a big difference
and they are all under the same category.
Compare to sole proprietorship or partnership,
the cost to set up limited company is higher
It involves book keeping, payroll,
GST account, CPP and EI etc. and
CRA will monitor much tighter as well.
On the contrast,
the Canadian government give a huge support to small business owner
For this video, I will only talk about the CCPC,
the Canadian – controlled private corporation
Were pretty much 90% of the small business are under CCPC
For any amount less than $500,000 business active income,
the corporate tax is between 11 – 15%
depend on which province your business is at.
Compare to 50% personal tax rate if you make $500,000 alone.
That is a huge gain already
Next, as the company owner,
you have more control in paying the shareholder
which is usually yourself again
usually in the form of salary and dividend.
since dividend has another tax advantage,
the shareholder (You) saves quite a bit from the two taxes.
But keep in mind,
dividend is not consider an active income,
so it does not contribute to your personal RRSP Room.
Also it might hurt your personal borrowing power
when it’s comes to mortgage
The other advantage CCPC has
after years of growing the business.
One day if you decide to retired,
you can dissolve or sell your practice to others.
There is a life time of $886,000 tax exempt quota
Let’s say John’s business start as 0 and
grow to a million when he sells it.
The growth is a million dollar minus the $886,000
which is $114,000
50% of that will be taxed. Which is $57,000 to CRA
Imagine if you sell an investment property,
and 1 million is the capital gain, 50%,
the 500,000 will be capital gain tax so $250,000 goes to CRA.
A big difference in here.
But of course,
CRA is always the smartest person in the room,
they let CCPC to have a huge tax advantage
under the small business deduction.
But now CRA targets and tax very heavily
on the corporate own investment.
For example:
Tom is a construction consultant and he has a Tom123.lnc.
Since most of the expense can be paid by the company,
Tom manages to save a million dollars
under the business account.
He does not want the money to lose to inflation.
He decides to invest the company's money to stocks,
rental property and leave some in the term deposit.
Sound pretty reasonable right?
Here is the fun part.
Under the CCPC tax rule.
For every dollar you earned on the interest,
50.67% will go to the CRA.
So for John,
if he gets 5% return from the company investment,
he needs to give $25,000 as tax. And that’s not it
If the passive income is more than $50,000 per year,
the $500,000 small business deduction will start to shrink.
Meaning instead of 11% small business tax rate now goes to 27%
Again, the house always wins.
Many small business owners are very involved
into their day to day practice
and that they fail to take time
to keep track of tax implication and plan for long term
They all feel that their accountants will keep them advise,
but in most cases,
they only report and do what they are told.
Not a lot of accountants give advice
on how to receive a maximum tax advantage
or what changes can be made to lower taxes
Keep in mind,
there is no TFSA for the corporation
But there are ways to create
tax shelter accounts for small business.
And besides from income and dividend.,
There are more ways to take it from corporation tax efficiently.
And that is another topic for next time
I will put all the useful links down below in the description box
If you are small business owner,
do you pay in yourself in salary or in dividend?
Tell me more in the comment below
This is Thomas!
If you want to learn how money works
and how you want to work with money,
then I will see you in the next video!