In Ontario, the Small Business Deduction allows a Canadian Controlled Private Corporation (CCPC’s) to pay tax at a lower rate on the first $500,000 of active business income providing great incentive for a business owner incorporation. If the business owner does not incorporate, personal tax rates are graduated and be over 50 per cent depending on income in the Province of Ontario. For example, the top marginal tax rate in Ontario for an individual is now more than 53% once income exceeds $220,000.
We see a significant difference in personal tax rates when compared to more favourable corporate tax rates, allowing our clients to pay a reduced level of tax on business income when it is earned through a corporation. We often find that tax reasons alone provide our client’s with an incentive to incorporate their business.
However, this reduced corporate tax rate is only one of the benefits to incorporating. If one of our clients chooses to flow profits out of the corporation by way of a dividend, we are able to offer them a second layer of protection and shield them from additional income tax that applies. If our client does not require all the income the business is generating to fund personal living expenses, we may advise our client to leave funds in their corporation for further tax deferral.
By leaving profits in the corporation, the business owner may be able to take advantage of a significant tax deferral, paying tax at a reduced rate, and keeping after-tax profits in the incorporated business. Tax is deferred until profits are paid to the client as a dividend, a decision that the client controls. In short, the ability to leave profits in the corporation provides a great tax incentive for incorporating in addition to many of the great credit proofing and estate planning opportunities that may be available.
If you are a business owner interested in incorporating or if you’d like to talk about how to set up a business in Ontario, feel free to contact J.P. McAvoy of ConductLaw at our Ottawa office. ConductLaw is an Ottawa based business law firm with locations in Ottawa, Barrhaven and Kanata. Our professionals are experienced business and real estate lawyers who can advise on residential real estate, commercial real estate, liens on property, implementing corporate structures that manage tax obligations, such as a corporation, partnership, family trust, testamentary trust, or any other type of legal entity.
ConductLaw is an Ottawa based real estate, business and estates law firm with three locations in the Ottawa area to serve clients. Feel free to call or write one of our professionals at firstname.lastname@example.org or 613.440.4888 for all of your business, commercial, real estate and estate planning needs.