Corpcentre's Blog

April 16, 2010

How the Self-Employed Can Save on Taxes

If you are like more than two million Canadians, you own your own business, either fulltime or part-time. Despite the sometimes heartaches of being self-employed, there are many advantages. Many entrepreneurs, though, are unaware of the various tax benefits available to them. In fact, running your own business can increase your after-tax income and contribute to family wealth.

Entrepreneurship and self employment promote a spirit of innovation, ultimately contributing to economic growth and vibrancy. As such, the government encourages entrepreneurship by taxing it at lower rates than regular income.

It is not uncommon for a new business to incur losses as it gets off the ground. These losses can be used to offset revenue from other sources, assuming you have a reasonable profit expectation as the business progresses. As your business begins to turn a profit, you can incorporate and the profits can remain in the corporation as a reinvestment in your operations. It is also possible to leave the profits in the business if you do not need a salary immediately. Thus, you can defer paying personal income tax. A salaried individual cannot schedule when to pay taxes. However, when you are self-employed, you can time payments to yourself when the tax payments are to your benefit.

Profits held in the corporation are taxable in the year they are earned. But, the corporate tax rate is low on the first $500,000 of active business income. While rates vary between provinces, all are below 20%. Personal tax rates on comparable amounts can be as high as 45%. It is also possible to pay salaries to family members in the business and have it taxed at their lower rates. Another possibility is to pay dividends to family members who own shares of the company and, thus, benefit from capital gains exemptions.

There are numerous possibilities for self-employed Canadians to benefit from management of taxes and income. All possibilities and options should be discussed at length with your tax advisor.

Incorporate in Canada with CorporationCentre.ca
Click. You’re incorporated ®

September 29, 2009

Small Business – Less Tax

However you dissect the finances of a business, specifically a small business, cash is the primary component of the bottom line. The more cash in the coffers, the more flexibility the business has.

The current global recession has dealt extremely harshly with Canadian small businesses. Reduced sales and credit restrictions have pummeled the cash flow of many worthy enterprises.

The Canadian government, seeking to ease the plight of this important and large sector of the country’s business community, has established several stimulus programs through its Economic Action Plan to provide much needed economic relief. Realizing that continued growth of small business is dependant upon available cash, the federal government has passed legislation that increased the amount of small business income eligible for a reduced federal tax rate of 11 percent. Effective January 1, 2009, the eligibility cap was raised from $400,000 to $500,000. Canadian-controlled private corporations that claim the small business deduction are eligible for this credit. By increasing the eligible income by 25 percent, the federal government is helping small businesses retain more of their hard-earned cash. This, in turn, will help stabilize the business community, create new, much-needed jobs, and promote economic growth throughout the nation. It is estimated that this reduced tax rate will cost the country more than $120 million over the next two years. However, with nearly half a million Canadians out of work, it is a wise investment and money well spent.
Canadian businesses can obtain detailed information from the applicable federal government agencies.

Incorporate in Canada with CorporationCentre.ca
Click. You’re incorporated ®

July 3, 2009

Why Should I Incorporate My Business in Canada? – Part II: The Advantages

Filed under: benefits of incorporating,Incorporating in Canada,tax benefits — corpcentre @ 12:54 pm

So you are thinking about incorporating. Here are some more advantages as well as potential pitfalls of incorporating:

Limited Liability

As we said in the previous post, a corporation is a separate legal entity from its owners, and the main advantage of that is that the owners, or shareholders are for the most part not liable for the corporations debts and obligations. They can only lose the amount they invested in the corporation. The creditors can only have claims against the corporation itself and not the shareholders.

Perpetual Existence

Being a separate legal entity, a corporation does not cease to exist if the shareholders, directors, officers or members die or retire. The ownership of the corporation and it shares can therefore be easily transferred. The corporation itself may also own property, enter into contracts and sue or be sued, independent of any individual involved.

More Potential Sources of Capital, More Attractive to Investors

Corporations can issue different classes of shares as well as different debt instruments, such as bonds, in order to raise capital. Sole proprietorships and partnerships cannot do so as easily. This makes it easier for corporations to attract investors as opposed to the other business forms.

Tax Benefits

Among other tax benefits, incorporating would cause your business to pay income tax at a lower rate than as a sole proprietorship or partnership. It would also be possible to carry forth losses of previous years that offset the profits of subsequent years.

Credibility and Prestige

Incorporating can very well lend greater credibility and prestige to your business dealings that you would not have otherwise. You might be seen as a more established company as opposed to before you incorporated.

Now that we have discussed some of the advantages, here are some formalities you should be aware that you would be subjected to upon incorporating:

Higher Start-up Costs

The cost to incorporate, including government fees, may be higher than those to initiate a sole proprietorship or partnership.

Maintaining Records

In order to provide shareholders with information, a corporation must keep meticulous records, as well as hold meetings and elect directors.

Double Taxation

This may seem like a disadvantage, however it can be minimized. The corporation pays taxes on its income and the shareholders pay taxes on their dividends (profits). But the corporation’s business expenses, such as salaries, can be offset by its income.

Incorporate in Canada with CorporationCentre.ca
Click. You’re incorporated ®

Create a free website or blog at WordPress.com.