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Tax Benefits of Incorporating a Small Business

Incorporating a Small Business in Canada

When it comes to tax planning for Canadian small business owners, it might make sense to incorporate your business.

As a small business owner, you should be looking for ways to minimize your tax burden and maximize your after-tax income. Incorporating a business can do just that.

Depending on what your business does and which province you operate in, incorporating can lead to lower taxes. Once the business is profitable, incorporating can also save you money.

When you start a business, it can be structured in 3 ways:

  1. A proprietorship
  2. A partnership
  3. A corporation

Understanding the advantages and disadvantages of each will help you decide if incorporation is right for your small business.

An experienced tax professional will be able to help you determine which is right for your small business.

When it comes to incorporating, you can do it federally or provincially. It depends mainly on whether or not you’re looking to do business in more than one province.

To incorporate your small business, you need to apply to the federal or provincial government, submit a unique name, proposed bylaws, and the names of the first directors.

Benefits of Incorporating

Small business owners tend to incorporate because it allows them to access tax benefits that are not available to unincorporated businesses, including income tax splitting, taking advantage of low corporate tax rates, and capital gains exemptions should you sell the business.

These benefits can help small business owners save hundreds or thousands of dollars every year.  

Lower Corporate Tax Rates

As a small business owner, you want to take advantage of as many tax benefits as possible. Incorporating a business allows you to be taxed at a lower rate compared to the tax rate for individuals.

For example, in Ontario, an incorporated business pays a tax rate of 15% on the first $500,000 of income each year and 26.5% for anything over that. Rates vary by province.

If you had registered your company as a sole proprietorship, you would have to pay the personal income tax rate on any profits. In Ontario, that means tax rates of more than 50%.

Protect Assets from Creditors

A big advantage of incorporating a small business is limited liability. The corporation is a separate entity from the shareholders.

The corporation owns and operates the business, and is responsible for any liabilities, not the individual owner or shareholders. The shareholders’ liability to creditors is limited to the amount they have invested into the company.

If your small business involves a great deal of risk, it might make sense to consider incorporating the business to isolate and protect your personal assets from creditors and lawsuits.

Capital Gains Tax Exemption

One of the biggest tax advantages to incorporating comes when it’s time to sell the business.

When you sell a corporation, you are selling an independent entity with its assets and liabilities.

If you sell an unincorporated business, you’re personally selling the property and assets.

For a corporation, you can claim a one-time capital-gains tax exemption of more than $800,000 per shareholder. If the small business was a sole proprietorship, any profits from the sale of a private corporation are taxed.

Many small business owners incorporate their business for this tax advantage alone.

Connect with your Local Tax Consultant to learn more

FBC, Helping Small Business Owners Minimize Their Tax Obligations

If you’re a small business owner and want to know about the small business tax benefits of incorporating, talk to a professional tax consultant at FBC.

FBC has worked exclusively with Canadian small business owners and farmers since 1952. Over the last 65 years, we have helped tens of thousands of clients from across the country minimize their tax obligations and maximize their assets.

For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.