First, some business owners will cross the Rubicon of incorporation sooner or later. The transformation from one legal personality to another is not without consequence: it is a crucial, irreversible choice that generates fundamental rights and obligations to be respected. With this in mind, we will discuss together the question of incorporation with the use of the following tags:
The concept of integration
Our tax system is based on the concept of integration. In a nutshell, the principle can be summarized as society’s tax fairness system. The more formal definition is one where the shareholder of a corporation will incur substantially the same combined tax burden as an individual who earns the same income.
For the most part, our system is almost perfectly integrated. However, believe it or not, in certain situations, the principle of integration can increase the business owner’s tax burden: “In certain circumstances, it could even cost him more […], according to Jimmy Lacoursière, tax specialist at Desjardins Wealth Management.
Tax savings
Contrary to popular belief, incorporation does not increase the accumulation of tax savings: “As for tax savings, this is probably the biggest myth associated with incorporation,” says the Desjardins tax expert. Consequently, there isn’t a Leprechaun with a pot of gold waiting to disseminate incorporation tax savings to our collective clients. The incorporation legend is only a tax legend!
Thus, the tax attributes surrounding incorporation have been primarily mitigated over time. At the same time, the budget tabled on February 27, 2018, by Finance Minister Bill Morneau has largely reduced the possibility of using its incorporation to economically diffuse retirement income to its shareholders.
However, as Jimmy Lacoursière confirms, incorporation will be preferred if the business owner cherishes other relevant and specific factors: “the evaluation must be done on a case-by-case basis according to different considerations […]. There are plenty of other good reasons to make incorporation relevant.”
Defer tax
A corporation’s tax deferral mechanism is effective if you can create excess liquidity in the corporation. In other words, if your lifestyle makes you consume all your business income, you lose one of the essential benefits of incorporation.
To this end, Jamie Golombek, CPA, CA, CFP, CLU, TEP, Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto, adds a vital nuance: “The advantage is not really in the tax deferral itself but, rather, what may be done with the deferred amount.” So, unequivocally, excess liquidity can give you greater financial and tax planning flexibility. In addition, it can increase your quality of life.
Other relevant factors
As mentioned, the deferred amount is one significant advantage stemming from incorporation. However, we know that incorporation has many other benefits, including perpetual existence, limited liability, estate planning, division of ownership, financing, capital gains deduction, family trust, death tax reduction, etc.