Written by: Aaron Grinhaus and Alisha Butani
Not written by: AI/ChatGPT, marketing company or ghost writer
When starting a business, many people choose not to incur the costs, administrative hassle, and accounting expenses associated with incorporating a corporation. However, there will come a time when incorporating makes sense for you to allow for the following advantages:
1. Reduced Tax Rate: If you are operating a business as a sole proprietor then all income derived from your business will be attributed to you personally and taxed at your federal and provincial/territory marginal tax rate. However, if the business is incorporated, then the business income will be taxed at a corporate tax rate, which may be substantially lower than your personal tax rate.
2. Liability Protection: If your business is incorporated, you can shield your personal assets such as your residence from liabilities associated with your business. As such this may provide you with a layer of protection if your business is sued or becomes bankrupt.
If your business is generating more money than you need to sustain your lifestyle or has potential liabilities that could accrue to you personally, then you should consider transferring your sole proprietorship business into a corporation that you own and control to reap the benefits described above.
Transferring your sole proprietorship into a corporation involves rolling title to the physical and “intangible” (e.g. customer lists and intellectual property) assets into an incorporated entity that you own and control. The business rollover can be done on a tax-deferred basis in accordance with subsection 85(1) of the Canada Income Tax Act, in order not to trigger any taxes on the transfer, which will be deferred until the corporation is sold, if ever. It is important to note that just incorporating a corporation and running your business through it without taking the proper measures required in a rollover could trigger adverse tax consequences.
Several criteria must be met in order for a rollover to occur on a tax-deferred basis, among them:
1. The corporation into which you are rolling the sole proprietorship must be a taxable Canadian corporation;
2. The assets transferred must be ‘eligible property’ as defined in the Act;
3. Instead of cash, you will get paid in shares for “selling” your sole proprietorship to the new corporation; and
4. You or your accountant must file an election forms that allow the rollover of the tax returns.
Your business is unique and will have distinct challenges and different tax strategies available. Grinhaus Law Firm has helped hundreds of businesses and professionals such as physicians and dentists realize the benefits of incorporation by navigating them through the challenges and pitfalls in the process so that they may enjoy the benefits that come with incorporation. Please contact us should you wish to learn more about your options, the process and costs involved. We would be happy to provide our expertise to see if incorporating is right for you and guide you through the process from start to finish.
PLEASE NOTE: THIS IS NOT INTENDED TO BE LEGAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. IT IS IMPORTANT THAT YOU CONSULT A LICENSED PROFESSIONAL TO ADDRESS THE NEEDS OF YOUR PARTICULAR CIRCUMSTANCES.