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Incorporation of Small Business

posted Oct 21, 2012, 3:54 PM by Margaret Lin CPA, CGA, CFP   [ updated Sep 12, 2016, 10:02 PM ]

Incorporating your small active business could save taxes to you due to small business deduction and dropping of the corporate tax rates.  In British Columbia, say you are in the highest tax bracket, additional of $1,000 income earned by the corporation instead of by sole proprietorship can save you $10 of taxes (after year 2013, this will cost you $6 instead -  click for new tax rules ). No matter save taxes or cost you more, if you choose retaining the surplus in the corporation, it will give you $302 of taxes deferred ($323 after year 2013). 

 

But if all of your business’ profits can only cover your personal living expenses, or if you withdraw all of business’ profits, you may lose the benefits of incorporation from tax saving point of view.  But the incorporation can still provide you the benefits like:

 

  • Personal assets protection
  • Income splitting
  • Deferral of bonus income
  • Lifetime capital gains exemption

When you consider using a corporation to split income, be careful of personal service business rules as they change the income of an “incorporated employee” from the low corporate tax rate to the high corporate tax rate- (click for the new rate) and deny the deduction of almost all expenses, no matter how reasonable.

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