Tax Advantages:

• Potential tax deferral through retained earnings.
• The $750000 capital gains exemption available for sale of a small business can only be claimed on the sale of shares of a qualifying corporation.

Net income of a sole proprietorship or a partnership is taxed directly in the hands of the owner. However, a corporation is a separate taxpayer with its own tax rates.

A corporation, incorporated in Canada, and controlled by private corporations or individuals who are Canadian residents will usually qualify as a "Canadian-controlled private corporation". This status allows it to claim the small business deduction, a reduction of the normal corporate income tax rate on the first $225,000 of a corporation's annual taxable income earned from carrying on an active business in Canada.

Another significant tax advantage to incorporation of a small business is the ability to claim the $500,000 capital gains exemption on a sale of the business. Where the shares qualify, the owner can sell them and the first $500,000 of capital gains are exempt from tax.

Disadvantages of Incorporation:

• A loss incurred by a corporation can't be transferred to its shareholders.
• Potential for double taxation if profits are too high.

Although it may be sensible to incorporate when considering issues of liability it may not be advantageous if your business is not yet operating at a break even point. A loss earned in a corporation cannot be transferred to its shareholders. On the other hand, owners of  unincorporated businesses may be able to deduct losses incurred against other sources of income or against future earnings for purposes of taxation.

Corporate profits from active business income exceeding $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. All income in excess of $225,000 should usually be paid out of the corporation by way of salary or bonus to avoid this.. If the corporation needs the cash  for operations, the income can be paid to the shareholder and then loaned back to the corporation. The salary  is, however, taxable to the shareholder at personal rates.

For more information or to arrange an initial meeting please call (613) 727-3845 or e-mail: info@robertson-sharpe.com