Incorporating your business in Canada or Ontario offers several key advantages that are worth considering. Let’s delve into the main benefits:
One significant advantage is the tax benefits that come with incorporating. These advantages include:
1. The small business deduction: By incorporating, you can benefit from the small business deduction, which effectively reduces your corporate tax rate to approximately 12.5% in Ontario on the first $500,000 of annual income. It’s important to note that certain eligibility criteria apply. The small business deduction is applicable only to active business income (not passive investment income), and it is exclusively available to Canadian Controlled Private Corporations (CCPCs). However, it’s crucial to keep in mind that this deduction acts as a deferral. When you withdraw funds from your corporation and they become your personal income, they will be subject to taxation at the marginal tax rates on your T1 return. As long as you retain the earnings within the company, the deferral remains in effect, allowing you to utilize the additional funds to grow and invest in your business at a lower tax rate.
2. The lifetime capital gains exemption: Another tax advantage of incorporating relates to the potential exemption from capital gains tax. If you sell shares of your business in the future, you may be able to realize tax-free proceeds of up to approximately $913,000. This means you won’t have to pay capital gains tax on the sale proceeds, up to the limit of your lifetime exemption (around $913,000). Like the small business deduction, there are specific eligibility requirements for this exemption. Generally, it is available when an individual has held the shares for a minimum of 24 months. Any unused portion of the exemption can be carried forward to future transactions.
Incorporating your business in Canada provides the advantage of limited liability. When you establish a corporation, it becomes a separate legal entity capable of entering contracts, borrowing money, and owning property. The concept of limited liability ensures that the corporation itself is liable for any breaches of contracts or repayment of loans. As a result, you, as an individual, are typically shielded from the debts, obligations, and liabilities of the corporation.
However, it’s important to note that limited liability is a general rule with exceptions in real-world scenarios. For instance, if your corporation borrows money from a bank, they may require you to personally guarantee repayment. Similarly, if your company leases commercial space, the landlord might ask for a personal guarantee of rent payment. Although there are ways to minimize personal guarantees, it’s crucial to understand that the limited liability protection of a corporation is not absolute. Directors of a company may also bear personal responsibility under specific circumstances. For example, if the company owes taxes or employee deductions to the government, directors can be held personally liable for these amounts.
Other Benefits of Incorporation in Ontario ( Canada )
Apart from the aforementioned advantages, there are additional benefits to incorporating, which we have covered in our blog article, “10 Compelling Reasons to Choose Ontario for Business Incorporation“. These include:
1. Perpetual Existence: A corporation has the potential for perpetual existence, meaning it can continue to operate even if ownership or management changes.
2. Advantages in Raising Capital: Incorporating can facilitate the process of raising capital through various means such as debt or equity financing.
3. Easier Inclusion of Multiple Owners: When incorporating, it becomes simpler to include multiple owners and allocate shares accordingly.
4.Tax Advantages in Ownership Transfer: Transferring ownership of a corporation can offer tax advantages compared to other business structures.
5. Avoidance of Transitional Expenses: Incorporating from the beginning can help avoid additional expenses associated with transitioning from other business structures later on.
For more information on how a corporation in Ontario can raise capital through debt or equity, you can refer to this article.
Setting Up Your Corporation in Ontario
Once you decide to incorporate, there are various aspects to consider, such as professional corporations and working with an accountant. These factors play a crucial role in ensuring a smooth transition and efficient management of your incorporated business in Ontario.