incorporation - adding spouse and child?

gobseck wrote: ↑ Hi all.

I saw some threads where people were asking about adding spouses as shareholders or directors, not sure.

I am about to register a corporation (IT consulting). Would it make sense to add my spouse and/or adult child in any capacity? They probably will be helping with the business, so I expect to pay salary or dividends...

As a background, I plan to have corp income for a few years, leaving some money in it, then retire and use funds from the corp as personal income (dividends?) for a few years. Will that work?

There are so many different variables and things to consider with this plan.

Basically:

• you can add your child/spouse as owners and pay them dividends but there are special rules that have to be followed to avoid payments being claimed as TOSI (tax on split income).
• passive income is taxed at 51% in a corporation if you don't pay out dividends, if you do, then you get a portion of the 51% tax back but you'll be taxed on it as personal income
• too much passive income will eat away at the favourable tax treatment of your consulting business
  
  Make sure you have a good accountant to guide you through it all and keep your books in tip-top shape.
  
  Tiberious

I find that talking corp. structure before proving you have sustainable business tends to be limiting.

Consider incorporating if and only if:

- you will have 5 customers in a given year
- you will have upto 5 employees whom you will be providing a T4
- you have multiple sources of income
- you plan to keep the funds in the business into the future

Otherwise - you will be taxed as a Professional Services Business - PSB - which gets ZERO tax benefits.
PSB's are unable to deduct any expenses (like a T4).
https://www.bccpa.ca/news-views-kb/news ... -business/

Looking at your plan to split income with your spouse/child - is a 1990's thing to do. If your accountant suggested that - its time to dump them.

absolutguju wrote: ↑ Consider incorporating if and only if:

- you will have 5 customers in a given year
- you will have upto 5 employees whom you will be providing a T4
- you have multiple sources of income
- you plan to keep the funds in the business into the future

The "if and only if" guidance is contrary to what my accountant and many other resources I have talked to about the matter. It's ultimately up to CRA to decide but I doubt the hard cut off is 5 customers a year. Having multiple customers is better but whether it is 2, 3 or more than 5 is debatable.

Do your own research but I would not take this answer as definitive as it comes across.

I'm an accountant and not in public practice. I heard about the TOSI rules but didn't read the fine print. In general the rules exist to prevent you from paying people who did no work and your sole purpose is to split income to avoid tax. If they are genuinely doing work, I believe it won't be a problem but the onus will fall on you to tell a plausible story and provide evidence if audited. Now for an IT business, I'm not sure how plausible it is to tell the story. If you run a family restaurant, I think it might be more plausible to have your family members help out.

You said shareholder & director. Note that they are different things:
-A person can do work for a corporation and receive salaries without being a shareholder or director. This would be an employee relationship.

-A shareholder is not required to do any work (picture yourself buying shares of Tesla from stock market). Shareholder means ownership interest in the business. If you own 20%, and one day you wind up the corporation and settle all assets and debts, then you'd be legally entitled to 20% of the net assets (assuming it's positive). Being a shareholder would generally entitle that person to dividends if declared for that class of shareholders.

-A director is not required to be a shareholder or an employee. A director means you're on the "board". A director's role is to oversee the corporation. In a small business settle, most directors are also shareholders and also doing the work like an employee. In general, being a director is NOT a benefit. Directors are PERSONALLY liable for certain things like unpaid CRA remittances. People generally only take on director roles to pad their resume, and most large enough corporations will be able to pay director fees. Plus...some people have vested interests and would love to influence the direction of certain companies.

My initial impression is that there probably isn't any point to adding them as shareholders/directors for a PSB style business. Assuming they are doing real work, and assuming CRA buys your story if audited, then you can already "cash out" legitimately via paying salaries.

A less pleasant point to think about is that if you add them as shareholders, it could create some problems down the road if your relationship with them gets sour (namely divorce).

absolutguju wrote: ↑ Consider incorporating if and only if:

- you will have 5 customers in a given year
- you will have upto 5 employees whom you will be providing a T4
- you have multiple sources of income
- you plan to keep the funds in the business into the future

Otherwise - you will be taxed as a Professional Services Business - PSB - which gets ZERO tax benefits.
PSB's are unable to deduct any expenses (like a T4).
https://www.bccpa.ca/news-views-kb/news ... -business/

Looking at your plan to split income with your spouse/child - is a 1990's thing to do. If your accountant suggested that - its time to dump them.

This makes total sense. If not incorporation what would be the ideal type of business to move to if you are doing PSB with less than 5 clients.

SaidapetFC wrote: ↑ This makes total sense. If not incorporation what would be the ideal type of business to move to if you are doing PSB with less than 5 clients.

There is no benefit to PSB - in fact, ITA specifically penalizes PSBs to deter people that are in a true employer-employee relationship from incorporating. I'll just say that the CRA is pretty good at saying one thing and doing another so there is way more to it than this and it is well beyond the scope of a forum.

This is where you should have a good accountant to guide you through this

Tiberious