Personal Finance

Seeking advice on incorporation and possible holding company

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  • Sep 5th, 2014 5:43 pm
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Newbie
Aug 30, 2014
8 posts
Toronto, ON

Seeking advice on incorporation and possible holding company

I'm thinking about incorporating a company for my business and personal assets. Does anyone have any thoughts on the pros/cons, suggested alternatives, and/or next steps?

As a quick background: i) I'm a general partner in a consulting company; ii) I'm looking to start another business (likely to be incorporated) with two others; and iii) I'm going to start holding some financial assets for my parents' retirement.

I was thinking of incorporating another entity that would own my equity stake in i) and ii) so as to minimise personal liability. As for iii), I'm not sure what (if any) vehicle would best protect those assets and minimise any taxes.

Does anyone have any suggestions? Thanks in advance
8 replies
Member
User avatar
Jan 11, 2007
431 posts
142 upvotes
Toronto
Hi Thomas,

The corporation decision can be complex and is probably not one that you can get a good answer about with all the amateurs on this site. You should really discuss with your accountant.

A few general comments:

- For i) and ii), if there is a reasonably risk of personal liability, that alone can be enough reason to incorporate.
- There is a cost to setup a corporation (say $1,000-$1,500) and an annual cost for the corporate tax return, bookkeeping and a corporate bank account (say $1,000-2,000/year), so you need a good reason to incorporate.
- Why would you consider a corporation for iii)? I've seen people wanting to invest for their unsophisticated parents money that can provide a higher income for them if invested well and that will be theirs after their parents pass away. Is that your situation?
- Investments in a corporation are taxed at the highest tax bracket, so all taxable investment income generally should be withdrawn and taxed personally every year. The main tax benefit of a corporation is to keep your business income inside the corporation to defer personal tax on it. Your options i) and ii) might have tax benefits ,but iii) probably has none.
- For iii), the most common solutions are to just add your name to their account for estate planning purposes and so you can control the investments, but still have the investment income taxed to your parents. You may also want to consider a Power of Attorney, so you can control investments in your parents' name.

I hope that's helpful, Thomas.


Ed
Ed Rempel
FEE-FOR SERVICE FINANCIAL PLANNER & TAX ACCOUNTANT
Email: ed@edrempel.com
Unconventional Wisdom blog: www.edrempel.com
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Deal Addict
Jan 15, 2009
1081 posts
456 upvotes
Just north.
One point I'd like to add is the ability to defer tax with a corporation. If your annual expenditure is less than the income generated by your CCPC, you can leave the retained earning inside the CCPC, thus potentially dropping you to a lower tax bracket. When you are retired, you can slowly draw the money, controlling which tax bracket you fall into. I tell my friends my CCPC is almost like my own RRSP.

Another benefit is if you're using after corporation-taxed money, but before personally-taxed money, to invest in Canadian stocks, the dividends are eligible dividends. They can flow to you personally, whilst retaining their status. Their special status along with enhanced dividend tax credit, will further lower your tax bill. In essence, you have more capital to invest than someone who doesn't have a CCPC.
Sr. Member
Jul 18, 2014
727 posts
98 upvotes
Toronto, ON
edrempel wrote: .

- Investments in a corporation are taxed at the highest tax bracket, so all taxable investment income generally should be withdrawn and taxed personally every year. The main tax benefit of a corporation is to keep your business income inside the corporation to defer personal tax on it. Your options i) and ii) might have tax benefits ,but iii) probably has none.
Thats is strictly for long term "investment" right? So buy and hold long term. And maybe long term capital gains.

But for day traders, who actively buy and sell lots of securities, then this is "active business income" and is thus taxed at the lower corporate tax rate right?

Basically, is it true that for someone incorporating to hold their assets for investing won't find any gains because the taxes are very high and works out to be the highest tax rate. had he held the investment in their name. But for day traders or futures traders or options traders, then these individuals do get a gain incorporating and day trading under the corporation due to the lower corporate tax rate, which allows for deferral of taxes kept in the corporation and presumably allows the trader to compound their trading gain?

So is it true if say someone doesn't need a lot of money to live on, but prefers to keep more of their money so they can continue to day trade, then day trading inside a corporation is more beneficial than day trading as an individual?
Newbie
Aug 30, 2014
8 posts
Toronto, ON
edrempel wrote: - For i) and ii), if there is a reasonably risk of personal liability, that alone can be enough reason to incorporate.
- There is a cost to setup a corporation (say $1,000-$1,500) and an annual cost for the corporate tax return, bookkeeping and a corporate bank account (say $1,000-2,000/year), so you need a good reason to incorporate.
Thanks for the insights and help, Ed.

There is no current risk of personal liability but I'm just thinking about how to insulate my personal assets from my business activities going forward. If for ii), my two partners and I incorporate (with equal number of shares and as the three sole directors), can my newly incorporated holding company a) hold those shares; and b) be named one of those three directors? I suspect the director needs to be a natural person but wanted to get everyone's thoughts on how I can use a HoldCo to minimise liability.
edrempel wrote: - Why would you consider a corporation for iii)? I've seen people wanting to invest for their unsophisticated parents money that can provide a higher income for them if invested well and that will be theirs after their parents pass away. Is that your situation?
- For iii), the most common solutions are to just add your name to their account for estate planning purposes and so you can control the investments, but still have the investment income taxed to your parents. You may also want to consider a Power of Attorney, so you can control investments in your parents' name.
To answer your question, this was admittedly a late-night (and now, clearly, non-sensical) idea on my part. Thank you the suggestion RE: joint accounts - but just two quick questions. I'm wondering, however, whether any of the investment gains (and associated taxes) would be attributable to me at my higher tax bracket. Upon their passing, would there be a deemed disposition (and taxation) of the account's investment holdings?
Newbie
Aug 30, 2014
8 posts
Toronto, ON
guyver0 wrote: Another benefit is if you're using after corporation-taxed money, but before personally-taxed money, to invest in Canadian stocks, the dividends are eligible dividends. They can flow to you personally, whilst retaining their status. Their special status along with enhanced dividend tax credit, will further lower your tax bill. In essence, you have more capital to invest than someone who doesn't have a CCPC.
This is interesting - thanks for bringing this up. Admittedly, my Friday morning mind is struggling to understand the flows though. Do you have any suggested articles or background reading on this approach?
Deal Addict
Jan 11, 2004
1277 posts
161 upvotes
guyver0 wrote: Here you go:

http://www.milliondollarjourney.com/div ... ration.htm

However, I'm not endorsing investing only in Canadian dividend stocks. That's undiversified to specific market and sector, not a very smart way to invest.
Bingo!

Most people are scared away by the high tax rates of "passive income" but that is only a partial taxation picture. Best to speak to an accountant that you trust and understands your personal situation.
Deal Expert
Feb 29, 2008
30106 posts
5547 upvotes
Montreal
My 2c. If you make less than 200k, incorporation is not worth it, since the running costs will eat you alive. Below 200k I would only incorporate if you must.

The benefits of incorporation lie mainly in income splitting or tax deferal. If you spend all your net profit for living, or you can't split income with a spouse or adult children, don't bother.

Incorporation is not a sure protection against liability. Some cases of liability do not protect the corp or it's assets. A more complex structure with a holding Co can offer additional protection. Setting up a family trust can protect you further against issues like divorce, or ne'er do well children. But the setup and running costs skyrocket.

Lawyers, accountants and advisors love incorporation, because they can bleed you dry with fees.

Disclaimer: I am incorporated.

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