Entrepreneurship & Small Business

DIY Provincial (ON) or Federal Business Incorporation 1-2-3 & Save your money

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  • Nov 14th, 2018 12:20 pm
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Jul 10, 2006
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Rental income on commercial property over 30k is taxable. If your not making that much commercial rent, don't setup the HST number. I did it but regret it but will claim anything I pay HST on for that unit.
"Truth is High, Higher Still is Truthful Living" Guru Nanak
[OP]
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Aug 2, 2010
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dhtlee wrote:
Aug 9th, 2018 6:08 pm
@eonibm could you elaborate on what you mean by this concept of integration? I pretty much have the same plans @ashs to set up a corporation for my short term rental business. As far as I understand, rental income without a corporation would count as an addition to your personal income, whereas rental income with a corporation would just be taxed at 15% corporate rate.
Integration is the underlying concept of the Income Tax Act, which is to treat income earned in a corporation and then later paid out to an individual to be taxed the same as if it was earned directly by the individual in the first place. If the Act did not employ the concept of integration then everyone would be setting up companies and saving on tax (aside from other rules that will already catch you doing that and not allow it). Note that you do not get the dividend tax credit on earnings that have been subject to the small business tax rate so when you later pay them out they are known as dividends not subject to the dividend tax credit. Integration is not perfect but almost perfect, ie the taxes paid are almost the same within 1-2% depending on the year, amendments to the Act, small loopholes that come up etc. However, when you add in the extra administration, paper work and accountants fees to file corporate returns it almost always becomes a net loss even if you are at a 1-2% tax advantage.

The only way you can benefit by earning through a corp is to keep the earnings in the corporation and earn a positive return on them. However, it takes 10-15 years of earning a positive return to benefit in any substantial manner and even so it is not that great. Most people who own small business corps don't do that. They either need the money sooner and if they don't then they don't necessarily make investments that do make a positive return.

FYI, you could have easily googled to get a much more comprehensive and likely more easily understandable explanation than I have provided. Example.

https://taxpage.com/definitions/tax-int ... echanisms/

FYI, another fantasy and fallacy is the masses who say that if you incorporate you can write off all kinds of expenses you otherwise could not. That is not the case. The CRA test for writing off expenses is the same whether you are a sole proprietorship, partnership or corporation. What people are doing by setting up a corp and writing things off that don't make sense otherwise is called cheating on your taxes.
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Apr 13, 2010
41 posts
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Mississauga
FYI, another fantasy and fallacy is the masses who say that if you incorporate you can write off all kinds of expenses you otherwise could not.
I hear this frequently as well, and the discussion had always been under the context of registering a corporation vs no registered business entity (i.e. sole prop, partnership or corp), in which case the claim is true as far as I understand.

Thanks for the explanation on the concept of integration, that does make sense. In my situation, I already have a full-time job that pays a substantial amount. The main short-term benefit for me (and I believe @ashs's as well) is that a corporation gives me a valuable tax-deferral vehicle. In the mid term, it allows income splitting under certain circumstances, e..g when either myself or my wife takes an extended vacation to raise our kids. In the long term, it is also a tax-efficient way to pass our wealth to our next generation.

I do agree that if someone is solely working on a business full-time and needs all the $$ he makes every year, then the business entity type makes no difference.
[OP]
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dhtlee wrote:
Aug 10th, 2018 5:35 pm
I hear this frequently as well, and the discussion had always been under the context of registering a corporation vs no registered business entity (i.e. sole prop, partnership or corp), in which case the claim is true as far as I understand.

Thanks for the explanation on the concept of integration, that does make sense. In my situation, I already have a full-time job that pays a substantial amount. The main short-term benefit for me (and I believe @ashs's as well) is that a corporation gives me a valuable tax-deferral vehicle. In the mid term, it allows income splitting under certain circumstances, e..g when either myself or my wife takes an extended vacation to raise our kids. In the long term, it is also a tax-efficient way to pass our wealth to our next generation.

I do agree that if someone is solely working on a business full-time and needs all the $$ he makes every year, then the business entity type makes no difference.
You can income split as a sole proprietorship as paying your spouse to do something for you is an expense of your business, so that isn't really an advantage of incorporation.

As for tax deferral it can help if you have a use for the $ inside the corporation. For example, you need to use the after tax income that you generate at the 15% small business rate in order to fund your company (capital improvements, assets to run the business, more inventory, etc.). If it is not required to grow the company and all it is doing is sitting there then your 'tax deferral' is not benefiting you unless, as I mentioned, you invest it for a positive return for 10-15 years. That being said, those benefits can get quickly eaten up partially or wholly (or even more) by the cost of being incorporated as you need a business bank account which costs money, most will need an accountant at $1.5K+ do your financial statements and T2 corporate return and then there are some annual filings which cost money.

As for passing the wealth on it is not a tax efficient method to do so. You need complicated trusts to do that. Being incorporated won't do that for you.
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Apr 13, 2010
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Mississauga
eonibm wrote:
Aug 11th, 2018 2:17 pm
You can income split as a sole proprietorship as paying your spouse to do something for you is an expense of your business, so that isn't really an advantage of incorporation.
There is still an advantage IMHO. What you're describing is a salary that is contingent on a service the spouse provide for the business. An incorporation allows dividend payouts, which can be done simply by assigning your spouse as a shareholder of your corporation, regardless of whether they provide a service or not.
eonibm wrote:
Aug 11th, 2018 2:17 pm
As for tax deferral it can help if you have a use for the $ inside the corporation. For example, you need to use the after tax income that you generate at the 15% small business rate in order to fund your company (capital improvements, assets to run the business, more inventory, etc.). If it is not required to grow the company and all it is doing is sitting there then your 'tax deferral' is not benefiting you unless, as I mentioned, you invest it for a positive return for 10-15 years. That being said, those benefits can get quickly eaten up partially or wholly (or even more) by the cost of being incorporated as you need a business bank account which costs money, most will need an accountant at $1.5K+ do your financial statements and T2 corporate return and then there are some annual filings which cost money.
Tbh, I believe anybody who registers for any business type have at least an average business sense, and anybody with an average business sense would let cash sit idle and accumulate. Even if there aren't any reinvesting opportunities in the business, there are always corporate investment accounts, or transferring out to holding corporations that can be used to create an investment portfolio (real estate, investment in other businesses etc.). Also, let's not forget that any cost of being incorporated are business expenses and can be written off. Hence the costs of a ~$2k corporate filing and business bank account fees (which a sole proprietorship would have anyways) are actually much lower than that.

I get that being incorporated isn't always necessary and beneficial, but I sense a little bias against incorporations in your arguments that I still can't really understand. I'm very new to this and I'm not an expert by any standards. However, my surface-level understanding of corporations so far tells me that they open up many more new options especially for the more aggressive business minded individuals as compared to sole proprietorship.
[OP]
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Aug 2, 2010
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dhtlee wrote:
Aug 12th, 2018 8:48 pm
There is still an advantage IMHO. What you're describing is a salary that is contingent on a service the spouse provide for the business. An incorporation allows dividend payouts, which can be done simply by assigning your spouse as a shareholder of your corporation, regardless of whether they provide a service or not.
Yes but the dividend payouts do not earn the dividend tax credit so there is no tax advantage over ordinary income. As for being contingent on service, well we all know how easily that rule can get flouted (spouse tallies receipts, empties the garbage cans, etc and gets paid $100K for it) and of course then there is the issue of division of assets in the case of divorce. Giving the spouse shares makes it easier - for the spouse!
dhtlee wrote:
Aug 12th, 2018 8:48 pm
Tbh, I believe anybody who registers for any business type have at least an average business sense, and anybody with an average business sense would let cash sit idle and accumulate. Even if there aren't any reinvesting opportunities in the business, there are always corporate investment accounts, or transferring out to holding corporations that can be used to create an investment portfolio (real estate, investment in other businesses etc.). Also, let's not forget that any cost of being incorporated are business expenses and can be written off. Hence the costs of a ~$2k corporate filing and business bank account fees (which a sole proprietorship would have anyways) are actually much lower than that.
The majority of 5 businesses fail in the first 5 years so it does not seem like the statistics bear out that those who register a business have even average business sense. You provide examples of where to invest the money generated. That doesn't add anything to what I have already said. You still have to have it invested for a very long time to gain an advantage tax-wise. As for write-offs, they are still an expense and at 15% small business tax rate that is still costing you 85 cents on the dollar so it is not 'that much lower' as you claim.

I am not biased against incorporating at all. I am stating pure facts. I have incorporated more than a dozen of them in my career for various businesses. However, I know why I am doing it and what the real benefits are. Unfortunately most people don't. They are a superb vehicle for a variety of reasons, limited liability being one of them. Saving on tax (aside from feeling it is more legitimate to write off bogus expenses) is not one of them for many people as most people don't keep their money sitting in the corporation for 10-15 years and generating a high enough return to provide a net tax benefit after all other expenses. Have you done the math? It doesn't sound like it given your admitted 'surface level understanding'. Perhaps you should. I have.
Newbie
Apr 13, 2010
41 posts
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Mississauga
Yes I have ran through some math with my accountant, and we are both in agreement that that my situation does require myself to be incorporated in order to be most tax-efficient. I see ashs being in a pretty similar situation as I'm in. Since you came out pretty strong against his reasons to incorporate, I got motivated to ask more questions to give myself a better understanding.

FYI you can be stating the facts and be biased at the same time. I appreciate your arguments and I actually learned a lot from you, but let's not get too serious Smiling Face With Open Mouth And Smiling Eyes
[OP]
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Aug 2, 2010
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So what was the % tax advantage he advised you of leaving one after-small-biz-tax-rate dollar in the corporation at an average return of 8% per annum for 15 years vs paying that pre-tax dollar out immediately? Did he give you that number or any other number for any other rate of return for any other period? Did he give you a chart showing various average rates of return and holding periods inside the corporation. If so did he net it out against the annual cost of incorporation? I highly doubt it and if not, these are the numbers you need to know, not just that it is 'tax efficient'. If he gave them to you then what were they? Otherwise he's just giving you a broad stroke of opinion without backup. I've run into a few bad or ill-informed accountants in my lifetime. One almost cost me one of my businesses and he was a chartered accountant.

It is impossible for me to be biased when I am talking about mathematical calculations. It's pure numbers and the numbers do not lie. Bias would be when I give an opinion that a number was not enough of a saving.
Newbie
Apr 13, 2010
41 posts
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Mississauga
Sure, I'll indulge. I don't remember the exact calculations, but I remember it was mostly on income and expense. I don't mind re-doing this, so here it is:
1) I spend ~$65k/yr (high estimate) to maintain my current lifestyle with my family
2) My wife makes ~$60k/yr as a regular employee - nets ~$45k after taxes, EI and CPP, i.e. there is $20k/yr more personal income that needs to come from my salary
3) I'm currently make ~$150k/yr (conservative estimate) as an incorporated contractor

By being an incorporated contractor, I can pay myself $25k/yr, i.e. ~$20k (after taxes, EI and CPP) as my personal income. This leaves ~$125k in the corporation subjected to corporate tax. Let's assume I incur $10k expense + $2k accountant fees, so ~$113k taxable income = ~$96k in corporation after corporate tax.

By being a sole proprietor, I am taxed according to personal income rate. I'm left with ~$140k taxable income after $10k expense, i.e. ~$94k personal income after tax. Since I need $20k of my income for my lifestyle, I have ~$74k left.

Given that it is ~$96k in corporation money vs ~$74k in personal money, wouldn't you say that it's simply more tax efficient to be incorporated?

I also have further use case to set up another holding corporation for my rental business (which I'm running but currently declaring as rental income), which allows me to transfer ~$96k as loan to my holding company to be used as downpayment for real estate purchases. In this use case, being incorporated is 100% more efficient than using the ~$74k after-personal-tax.
[OP]
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Aug 2, 2010
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Sorry but you are missing the entire point.

When you pay out the $96K in the corp it is treated as a Canadian non-eligible dividend, ie not-eligible for the dividend tax credit. That is because it was derived from income subject to the small business rate. Now let's assume you pay it out the following year. That additional non-eligible dividend $96K paid to you after tax is about $74K in after tax income to you, give or take a few shekels, but possibly fewer (I'd need to do the exact calculation for your personal situation and also with CPP, EI, etc to give you the exact number). Thus you ended up in the exact same situation you would have had you just paid it out immediately. That is the concept of integration, which underlies the entire Income Tax Act of Canada.

Now if you paid it out many years later and it earned a positive return then there is a bit of a benefit tax-wise. However, what is it? Is it worth it for you? (Will you actually keep the money in the corp that long?) There is only one way to know as I explained. So, what your accountant should be doing, but obviously did not, is show you the chart that I mentioned above, ie how many extra shekels do you end up with at various return rates for various holding periods? The explanation you gave above misses 9/10ths of the picture. That is the only way you can determine what the benefit is. Right now you do not know what it is. When you know what it is only then can you decided whether it is worth it for you, given your personal situation, time horizon, etc to hold the money in the corporation. Your accountant should not be making that decision for you as his value matrix is not necessarily yours. At the minimum, he should show you the effect of holding the money in the corporation at various rates and holding periods.

I note your last comment re loaning. Again, that is merely an investment and does not change the picture on the benefit once monies are paid out.
Newbie
Apr 13, 2010
41 posts
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Mississauga
As I have already mentioned, I don't need any extra money other than the ~$65k to maintain my current lifestyle.

I am struggling to understand why you're insisting to compare the scenarios as though I need to pay myself out in full. It is blatantly obvious that it isn't a good idea.

The way I avoid paying myself out in full is via incorporations in the form of retained earnings, hence the advantage over sole proprietorship. $96k investment with 5% annual return at corporate tax rate > $74k investment with 5% annual return at marginal tax rate. With the option to strategically pay myself out or my wife in lower income years, it is guaranteed to come out ahead.
[OP]
Deal Guru
Aug 2, 2010
12703 posts
3118 upvotes
Here 'n There
Exactly what I figured. You clearly do not have a grasp of the particulars of what you are talking about. It's 'guaranteed to come out ahead' sounds like a salesperson's pitch when they want you to buy something. You don't have a single number to back that up. You don't know where between 0 and 100% that 'ahead' is. For all you know it could be a 15%, 10%, 5% or even 1% tax savings. As for time horizon you don't even know what time horizon or average return rate would be required to achieve the undefined % tax savings you are 'ahead' by. That you are making very major long-term decisions about your money without knowing the outcome is very unwise. Remember, you don't know what you don't know. The fact your accountant is not providing you with the data that he should is pathetic. You need to switch accountants to one that has thoroughness and completeness as a hallmark.

Hope is never a good strategy.
Newbie
Aug 22, 2006
64 posts
28 upvotes
Thanks OP for the valuable info.
Rbc has the option to wave the additional fees if u open business account with them.

https://www.ownr.co/ca/en/support

Also, quick question. Are we allowed to have multiple operated business name under one corporation. If there is any limitation. Eg. Can I able to have IT Support contract work and real estate rental business under a. Single corporation.

Thanks for the advice
Newbie
Mar 5, 2018
47 posts
17 upvotes
Thanks OP, your post is really helpful and professional.

I would like to know if I incorporate my company as ABC inc with Ontario, can someone uses the exact same name to incorporate with Federal? How the NUANS reports different between Ontario and Federal? It looks like they are not the same database list.

Thanks
Member
Mar 14, 2009
252 posts
282 upvotes
Toronto
eonibm wrote:
Aug 15th, 2018 10:05 pm
You don't know where between 0 and 100% that 'ahead' is. For all you know it could be a 15%, 10%, 5% or even 1% tax savings. As for time horizon you don't even know what time horizon or average return rate would be required to achieve the undefined % tax savings you are 'ahead' by. That you are making very major long-term decisions about your money without knowing the outcome is very unwise.
Couldn't agree more.

And also too cheap/low-revenue to hire an accountant at the moment and too time-starved to DIY. So I will just ask you this: integration aside, what about not having to pay the CPP contributions if you take dividend vs. income?

Seems to me that's a win (setting aside the future value of the CPP contribution you're missing out on; I'm assuming the drop-out/child rearing provisions in my case will lessen the sting there).

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