When to incorporate is a question our professional clients often ask our trusted advisors. While incorporating can be very advantageous, it is not a one-size-fits-all decision. The decisions to incorporate depends on your professional circumstances, career stage, income level, and other factors.
In this article, Crowe MacKay's tax advisors explore the benefits and considerations of incorporation for Canadian professionals across various income levels. If you require assistance, connect with us in Alberta, British Columbia, Northwest Territories, or the Yukon.
Considerations When Looking to Incorporate
Do I Earn Enough Income to Make Incorporating Advantageous?
Generally speaking, if you are earning income over of the top
marginal brackets, it is likely time for you to speak with your
trusted advisor. However, on occasion, you may incorporate even if
your earnings are not above the top marginal brackets. For example,
you may have low spending needs or a dual-income household,
allowing you only to require some of the income you earn.
Download Tax Rate Card – Includes Top
Marginal Rates for Select Provinces
Should I Incorporate Even if I'm Not a High-Income Earner?
Incorporating in Canada is a strategic decision that can benefit professionals, even if your income isn't extremely high. Here are several reasons why incorporating might be a smart choice for those with moderate earnings:
- Future Income Growth Potential: If you anticipate that your income will increase in the future, incorporating early can set the stage for tax-efficient income management.
- Retirement Planning: Incorporation allows for more options when considering your retirement income and increases opportunities for income splitting at retirement.
- Income Splitting with Family Members: This may provide for additional opportunities to income split where family members are actively engaged in the business.
Incorporating can offer several strategic advantages for professionals even if their current income isn't high. It's crucial to consider these factors in conjunction with your overall financial goals and discuss them with a tax advisor to make an informed decision.
How do I Make Incorporating Benefit Me the Most?
The real benefit of incorporating is the tax deferral. The more income you can leave behind to be taxed in the corporation, the greater the benefit. This is generally because the tax rate applied to professional income in a corporation is far lower than the personal tax rates at the top marginal brackets.
For example, in 2023, the tax rate on professional income in a corporation in British Columbia (BC) was 11% on the first $500,000 of income and 27% on income over $500,000. Meanwhile, the BC personal tax rate on income over $240,000 is 53.5%. When income is generated in a corporation and not withdrawn, this rate difference results in the tax deferral and more dollars available to be invested and grow.
Should I Still Incorporate if I Need All My Income?
If your current cashflows do not allow you to set aside funds, this may indicate that it's not the right time to incorporate. However, the key here is to talk to your advisor and identify if reducing your personal taxes by incorporating would allow you to set aside funds.
Can I Reduce My Taxes Further by Income Splitting with My Spouse?
The ability to income split has changed over the last few years and may not be as immediate as you'd hope. This is because there are certain income splitting rules, referred to as tax on split income, or TOSI, where dividends paid to certain shareholders are taxed at the highest rate. While there are some exclusions, TOSI will likely apply to dividends paid to a spouse not active in the business. In most cases, paying your spouse dividends must wait until you are 65. In the year you turn 65, you may begin paying dividends to your spouse and taking advantage of income splitting.
Other strategies for income splitting include paying your spouse a wage for the assistance they provide to your corporation. The key here will be to determine a reasonable salary based on what you would pay a third party for the same work.
Frequently Asked Questions about Incorporating
Is Incorporating Beneficial for Professionals with Moderate Income?
Yes, incorporating can be beneficial even for those with moderate income. It offers advantages like tax deferral, business expense planning, and opportunities for future growth.
What are the Tax Benefits of Incorporating in Canada?
The primary tax benefits include lower corporate tax rates, allowing for tax deferral and reinvestment of pre-tax earnings back into the business, and potential eligibility for the small business deduction.
How does Incorporation Affect Retirement Planning for Professionals?
Incorporation allows for tax-deferred growth of retained earnings within the corporation, which can be a significant advantage for retirement planning.
Can I Still Benefit from Incorporating if I Need all My Income Now?
Incorporation may still be beneficial depending on the level of tax deferral that can be achieved. It is important to assess your specific costs and benefits with your advisor before incorporating.
What are the Implications of Incorporating for Family Income Splitting?
Incorporation offers potential income-splitting opportunities, though they are subject to Tax on Split Income (TOSI) rules. Strategies include paying wages to family members actively involved in the business.
Are there any Downsides to Incorporating?
Incorporation involves additional costs, like legal and accounting fees, and requires more complex tax filings and compliance with corporate governance.
When is the Right Time to Consider Incorporating?
The right time varies based on individual circumstances, including income level, business expenses, future growth potential, and long-term financial goals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
