Question and Answers

Questions and Answers – Incorporating

Published On March 2, 2013 | By Joseph (Ken) | Q&A

Question: A friend told me that I should incorporate my business.  Should I and isn’t it expensive?  

Answer: As this is a common question, I created a brochure for clients to hopefully help them with the decision (see pic below).  The fundamental issue is: are you making more money than you need?

When you are a proprietorship you are taxed personally on every dollar you earn at an average of 30% to 40%, even if you don’t “need” it or spend it.  With a corporation, you are only taxed personally on the money you withdraw from the corporation.  Although the corporation does pay tax on the income it earns, it only pays tax at 13.5% (soon to be 14.5% with the latest BC Budget) and there are ways to withdraw the funds from the corporation that take the tax the corporation paid into account and so lower your personal tax rate to 0%.  It’s important to remember though that you need to leave excess fund in the corporation in order for the corporation work for you as a tax savings (and retirement) vehicle.

As for the cost to incorporate, if you use a lawyer it can cost upwards of $1,200 to $1,800 but if you do it yourself online using Corporate Online, you pay less than $400. There are additional costs each year, as you will have to pay $45 to keep the company in good standing with the Corporate Registry and file a corporate tax return with Revenue Canada.  Although a corporate tax returns can cost anywhere from $300 to $2,000 (depending on the accounting firm you use and the fees they charge), the potential tax savings can add up quickly, depending on how much income you earn and leave in the company (for example, if your company earns $80,000 and you leave $40,000 in the company, you pay $5,800 in corporate tax instead of $12,800 personally – a $7,000 tax savings).

Tell your friend that they give good advice!

Incorporation brochure

 

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About The Author

Joseph (Ken)
(Ken) is a Registered Public Accountant with over 25 years of public practice experience in the accounting profession. Ken specializes in accounting information systems, taxation and financial reporting.

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