Canada is one of the best places in the world to open a business!!!!
What makes Canada such a great place to do business?
Across all Provinces and Territories of Canada the corporate tax rate is one of the lowest available around the world.
Whether you are a domestic or foreign entrepreneur looking at starting a business, Canada is open for business and offers each and every business owner the availability to establish, operate and grow a business at a resounding low tax rate.
We have a few options available to us to establish a business in Canada. One is to set up a business licence commonly called a Sole Proprietorship, General Partnership/Partnership, the other option is to incorporate or bring an existing corporation into Canada.
When you consider a business licence available in most jurisdictions across Canada, the licenses are taxed at a person’s taxable income rate. The personal tax rate is much higher than the corporate tax rate and the corporation provides a number of benefits to a business owner.
Incorporation and Taxes
When establishing an Incorporation within Canada, the corporate filing is sent to Revenue Canada to establish the corporate tax account for your corporation. This is completed internally between the two layers of government. Revenue Canada will establish a BN number or Business Number for your corporation. The BN number is similar to a social insurance number for an individual in that no matter what the corporation is doing whether paying corporate tax, setting up and paying HST or Payroll, the same number is used in each case with a different extension depending on which tax branch is applicable.
Incorporation and Taxation in Ontario
In this article, I am going to speak specifically about the corporate tax in Ontario. The overall information is applicable to any incorporated company across Canada.
The incorporated company is a separate legal entity from you as an individual and therefore requires its own tax filing with Revenue Canada. Currently, the corporate tax rate between the Federal and Ontario governments combined is 15% for the first $500,000.00 in revenues. This gives the business owner the ability to maintain more revenues within the business to help expand, employ, buy equipment etc. If an individual had registered a business registration, the tax implications would be listed on that individual’s personal tax return which can be as high as 50% on revenues.
The lower tax rate for an incorporated business is a key advantage to incorporating a business however, the lower tax rate is only available when you are able to maintain revenues within the corporation instead of drawing the money out personally.
As an example, if you incorporate a business and the sales are $200,000 with expenses of $70,000.00 and you use the remaining money for your personal income where you pay yourself $130,000.00 in income, the income is recorded fully as personal and the incentive for the corporate tax rate is not available for that year.
Alternatively, if you take the same $200,000.00 with expenses of $70,000.00 and take $80,000.00 dollars out of the corporation for your income and leave $50,000.00 within the corporation, you will be taxed personally on the $80,000.00 and the remaining $50,000.00 you have left in the corporation will be taxed at the 15% rate which is much lower than the personal tax rate.
When it’s time to sell the business
Another tax advantage to incorporation comes when you sell the business. The shares of most Canadian private corporations are eligible for a capital gains exception. Currently, each shareholder has the ability to hold a personal life tax exception of over $800,000.00. This allows shareholders of a corporation to sell the business without paying personal tax to the threshold of the tax exception. If the business owner operated a Sole Proprietorship, General Partnership or Partnership, the individuals would be taxed at the personal level for the sale of their business.
The federal government has attempted to remove the benefit of income splitting for individuals in Canada who own a corporation. The income splitting allows business owners the ability to distribute part of their income to a lower income spouse. If children of the business owner assist with the operation of the business, income can also be disbursed to the children.
In the beginning of setting up a business, you can feel overwhelmed making decisions for today and the future of your business. It is always recommended to speak to professionals about your specific legal and financial situation before proceeding to set up the business.
Ontario Business Central has been assisting individuals to incorporate businesses for over 25 years. If you would like to incorporate your business, we would very much appreciate the opportunity to help you in completing your incorporation. See links below to start now!
If we can be of assistance, please feel free to reach out to our staff for any clarification or assistance you may require.
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Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. It is always recommended, when you have legal or accounting questions that you speak to a qualified professional.