Formation of Corporation

Like other part of the world a person can earn money in two broad capacities. One working as employee and second working as self employed. As a self employed a person can have two choices first to do business as unincorporated entity and secondly to incorporate his business.

 

Following are the advantage of incorporating ones business:

  • Low tax rate to Canadian controlled private corporations on their Active business income. As per the present provisions CCPC are required to pay tax at 15.5% rate up to first $500,000 income if they are operating in Ontario against the 46.43% which are applicable to individuals.
  • Any business liability which arise out of business transaction and for which no personal guarantee has been given does not falls on the personal Assets of the business owner
  • This structure can be effectively used for succession planning and estate planning purpose
  • The other main tax advantage to incorporation of a small business is the ability to claim the $750,000 capital gains exemption on a sale of the business. The complex rules provide, in effect, that to claim the exemption the shares must be of a Canadian-controlled private corporation, at least 90% of the assets of which are used in an active business carried on in Canada, or a holding company which owns such shares. Where the shares qualify, the owner can sell them and the first $750,000 of capital gains are exempt from tax.

Following are some disadvantage of corporation

  • Losses Trapped
  • Any business which is not operating at the break even point should not incorporate from a tax point of view, although it may be sensible to incorporate when considering limiting liability. A loss earned in a corporation cannot be transferred to its shareholders. Conversely, owners of an unincorporated business would be able to utilize losses which they incurred against other sources of income or against future earnings. Losses which arise in a corporation can only be offset against earnings in that corporation.
  • Double Taxation
  • A potential double taxation trap exists if an active business earns too much profit.
    Corporate profits from active business income in excess of $200,000 per year are taxed at full corporate rates. Integration of the personal and corporate tax systems does not work at that rate, resulting in an element of double taxation. Therefore all income in excess of $200,000 should usually be paid out of the corporation by way of salary or bonus to avoid this double taxation trap. If the corporation requires the funds for operations, the income can be paid to the shareholder and then loaned back to the corporation. The salary receipt is, however, taxable to the shareholder.
  • Other Disadvantages
  • A corporation is also subject to strict rules governing the taxation of shareholder benefits, such as shareholder loans or the use of a company car.
    Finally, the transfer of the unincorporated business or partnership to a corporation will be a taxable transaction unless a rollover agreement is made and the appropriate election is filed with Revenue Canada. Provided such an election is made, however, the transaction can be free of any immediate adverse tax implication.

But after evaluating the advantage and disadvantage the benefits of corporation over turn the disadvantage of the corporation. The only situation when the corporation is not advisable is at the time of starting a business when in the initial period expenses are more than income and we are incurring financial loss. Such loss can be off set against other personal income and reduce the overall tax liability.

We at MITAX help our client to have correct business structure and also form the corporation along with the other corporate records.

Tax Planning for Corporate Owners

Corporations have always been the favorite business models for the business people because of the following reasons:

Share Holder Remuneration Strategies

Whenever share holders withdraw the money from the business it is a taxable event and can trigger the tax liability. Here the roll

Mitax Financial Corporation
2355 Derry Rd. East, Unit 46 (Upper Floor),
Mississauga, Ontario L5S 1V6

Telephone: (905) 461-4949
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FAX: (905) 677-6423
E-mail: info@mitax.ca

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