Just the other day, Joel, a client of mine, a young real estate broker, asked me when he should incorporate himself. I gather that at first, he thought I would give him a cookie-cutter, easy answer. However, nothing is easy when transforming one legal personality to another; we must use caution and nuance.

From the outset, some business owners will cross the Rubicon of incorporation sooner or later. But, in Joel’s case, he didn’t expect it to come so soon. As you know, Canada’s real estate market has not stopped going gangbusters for the better part of the last 20 years. Moreover, Joel worked for his dad’s construction company, and things went well. He was earmarked to take over the company in 10 years.

The truth?  He was miserable. He didn’t enjoy the daily grind of building houses and found himself daydreaming, wishing, and longing for a different path in life. Then, finally, a friend of his told him that he should explore the virtues of becoming a real estate broker:

« Joel, you would be perfect for that job; you know everything about houses.»  Immediately, he had a « come to Jesus’s moment,» and this simple conversation sealed his fate. He found himself in real estate school the following month.

Here we are now, at this junction, where Joel is relatively prosperous and inquiring about incorporation. But, of course, many of his colleagues are incorporated and have told him: « Joel, it’s a goldmine; you will save tons of money.» When he told me this, I nearly choked drinking my coffee!

Then, he asked me:

« Luc, just give it to me straight, I made 300,000$ last year, and I’ll probably make more this year; should I incorporate? »

With his question in mind, I took out a piece of paper, grabbed my Sharpie fine point marker, and drew three circles: « Joel, for me to answer your question, we must first and foremost establish the true concept of incorporation without any of the tax myths. » Within every circle, I wrote down the following tags and preceded to explain the different concepts:

Tax 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. Furthermore, there should be no difference in the amount of taxes paid between a person who is an employee and someone who’s incorporated and has their own business.

Tax savings: Contrary to popular belief, incorporation does not increase the accumulation of tax savings:  « As for tax savings, Joel, this is probably the biggest myth associated with incorporation. Consequently, there isn’t a Leprechaun with a pot of gold waiting to disseminate incorporation tax savings. »

Defer tax: The incorporation mechanism is effective if you can create excess liquidity in your business. In other words, if your lifestyle makes you consume all your business income, you lose one of the essential benefits of incorporation.

In short, we ended the meeting with me explaining other relevant factors to be considered:

« Joel, take a few days and think about what we discussed today. Other relevant factors include perpetual existence, limited liability, estate planning, division of ownership, financing, capital gains deduction, family trust, and death tax reduction. »

Joel said he would follow up with me in a few days.