Incorporating your business
ARC CPA is a Halifax accounting firm. We help business owners work out whether incorporating makes sense for them, set the company up properly alongside their lawyer, and keep its books and taxes from the first day.
Should you incorporate? It depends on how much you can leave in the company
From a tax point of view, whether you should incorporate comes down to one thing: how much of your profit can stay in the corporation, where it is taxed at a lower corporate rate, instead of being paid out to you as personal income, which is taxed at a higher rate.
Here is how that plays out for two businesses with the same profit.
$150,000 profit, $80,000 taken out
The owner needs about $80,000 a year to live on. The other $70,000 can stay in the company, taxed at the lower corporate rate instead of the owner’s higher personal rate. That difference adds up every year, and the money left in the company can be invested and taken out later when it suits. Incorporating saves this owner real money.
$150,000 profit, $145,000 taken out
Same business, same profit, but the owner needs nearly all of it every year. Almost nothing stays in the company, so there is little to tax at the lower rate. Incorporating makes far less difference, and once the higher accounting costs of running a corporation are counted, it may not make sense at all.
How incorporating actually saves tax
The difference comes down to who pays the tax, and on what.
How incorporating with ARC CPA works
Incorporating is about setting the business up properly for tax. We get to know the business and your finances, then structure it so your tax stays as low as it can be from day one.
- 01
We get to know the business
What the business earns, what you need to take out of it, who is involved and where you want it to go. That decides whether to incorporate at all, and when.
- 02
We help design the structure
Who should hold shares and whether a holding company belongs in the picture, with the reasons for each recommendation explained.
- 03
Your lawyer makes it legal
We write a memo of direction telling your lawyer how the business should be structured when it is incorporated. The lawyer handles the legal side, and we make sure it works for tax.
- 04
We bring your assets in
Equipment, vehicles and tools you already own move into the company by sale, rollover or rent, whichever works best for you and your tax situation.
- 05
All your accounting set up on day one
Business number, HST and payroll accounts with the CRA, the right bank accounts, QuickBooks and Dext, and a year end that suits the business.
Once the company exists, we look after its books and tax from the first transaction, so the structure we designed is the one that actually runs.
Find out if incorporating makes sense for your business.
Tell us what the business earns and roughly how much you need to take out of it each year. We will tell you whether it is worth looking at properly, including if the answer is not yet.
Why your accountant should structure the corporation from the start
The decisions made the day a corporation is set up shape its taxes for years: who holds the shares, how money will come out, and when its fiscal year ends. A year end, for example, is chosen on the first return and needs the CRA’s approval to change later. These are tax decisions, and they are far easier to get right at the start than to unwind afterwards.
A lawyer guides you on liability. An accountant guides you on tax. A general corporate lawyer usually will not advise on the tax side, and should not. So we recommend the structure and the year end for tax reasons and put it in a memo, and the lawyer can see why it is set up that way when they draw up the paperwork.
Some clients have a lawyer they already trust. Others ask where to start, and we give them a few names. We have no referral arrangement and take no cut. We point people to firms that do good work on reasonable timelines and send us the paperwork as soon as the company exists.
You can incorporate a company yourself online, and for a simple setup with one owner, it can work. More often we see a share structure that does not fit, registrations missed and CRA requirements from the first day that nobody mentioned. For most owners the legal fee is money well spent, not least when it comes time to sell the business.
Bringing your existing assets into the company
If you have been running as a sole proprietor, you already own things the corporation is going to use: trucks, equipment, tools. How they get into the company matters for tax.
There are three ways to do it. The company can buy them from you, you can rent them to the company, or we can do a section 85 rollover, which moves them into the company without triggering tax and can let you take their value back out tax free over time.
We list everything you own going in and work out the best way to bring each piece across for you and your tax situation.
What changes the day after you incorporate
The system you ran as a sole proprietor stops working the day you incorporate, and the first few weeks can feel overwhelming. There is a new business number, which means a new HST account and possibly a payroll account. The company needs its own bank account and credit card. And the bookkeeping becomes a different beast entirely from how you kept the books as a sole proprietor. A corporation uses double-entry bookkeeping: every transaction has two sides, and everything has to balance and reconcile.
That separation is a benefit in itself. Once the company has its own accounts, business spending is no longer mixed in with personal, so fewer expenses get forgotten and nothing depends on finding a lost receipt. It also tells customers something: Inc. or Ltd. after your name reads as a professional, established business, not a side project.
Then there is the question of paying yourself. Salary or dividends is a real decision with CPP, payroll, workers’ compensation and even your next mortgage riding on it. We work out the mix that suits you, and revisit it as things change.
What people get wrong about incorporating
Mostly the timing. Plenty of businesses are incorporated with no tax reason to be, and spend more on legal and accounting every year for nothing. Plenty of others should have incorporated years ago and are still paying personal tax on every dollar. Incorporating too early costs money, and so does incorporating too late.
After that it is the structure: shares in the wrong hands, or no thought given to where the business will be in ten years. Both are far easier to get right at the start than to unwind later.
If your company is already incorporated and the structure is not working for tax, it is not too late. We review how it was set up and recommend the changes that make sense.
Incorporated, but still running it like a sole proprietorship?
If you set the company up yourself, or kept the spreadsheet and the personal credit card, send us a note. We will look at how it was set up and tell you what, if anything, needs fixing.
Dates and rules to know.
- Small business rate
- Active business income up to $500,000 a year is taxed at a much lower corporate rate, and related companies share that limit
- Year end
- A new corporation chooses its fiscal year end on its first return. Changing it later needs the CRA’s approval
- Corporate return
- A T2 is due six months after year end, every year, including years the company earns nothing
General guidance only. We confirm the dates that apply to your business when we talk.
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Incorporating your business, answered.
Should I incorporate my business?
From a tax point of view, it depends on how much of the profit you can leave in the company. If you can leave money in, incorporating usually saves tax. If you need nearly everything it makes, it often makes little difference. Liability is a separate question for a business lawyer.
At what income should I incorporate?
There is no single number. Two businesses with the same profit can get opposite answers, because what matters is how much of the profit the owner needs to take out. That is the first thing we look at.
What are the tax benefits of incorporating?
You pay personal tax only on what you take out of the company, and profit left inside is taxed at a lower corporate rate. Over time, taking a steady income and investing the surplus through the company keeps you out of the top personal brackets. It is a saving and a deferral at the same time.
Can I claim more expenses if I incorporate?
No. A business expense is a business expense either way. What changes is how some of them are claimed, and vehicles are the classic example.
How do vehicle expenses work for a sole proprietor compared with a corporation?
A sole proprietor tracks every vehicle cost, keeps a logbook of business and personal kilometres, and claims the business percentage of the costs. Incorporated, there are two routes: the company owns the vehicle and it is used only for the business, or you drive your own vehicle and the company reimburses you for business kilometres, tax free. Mixing the two causes problems.
Should I pay myself a salary or dividends?
It depends on your situation as much as the business. A salary brings payroll, a T4, CPP the company matches and sometimes workers’ compensation. Dividends have no paperwork but are not an expense to the company. If you are applying for a mortgage, your bank may want to see a T4. We look at corporate and personal tax together before recommending either.
Do I need a lawyer to incorporate?
You can incorporate yourself online, and for a very simple setup it can work. For most owners a lawyer is worth it, particularly where more than one shareholder is involved. We design the structure for tax and give your lawyer a memo of direction, and we can suggest a few firms if you do not have one.
Should I incorporate federally or provincially?
It mostly depends on whether you will operate in more than one province, or sell across the country. That part is a legal question and your lawyer will advise on it. We make sure whichever you choose works for tax.
Do I need a holding company?
Not usually at the start. A holding company earns its place once the business has built up money it does not need, for investments or property kept apart from the operating company, or years before a sale. We raise it when your situation calls for it.
What year end should my corporation have?
Generally, anything but December 31. A year end that crosses two calendar years gives flexibility over which personal tax year dividends land in. We choose one around your business, your seasons and your HST filing.
I am incorporated. Should I still put money into an RRSP?
Often not. If you are putting money into an RRSP you did not need that money this year, and for an incorporated owner that usually means taking more out of the company than you needed, paying personal tax on it, then buying an RRSP to get some of that tax back. Investing through the company is usually simpler. It is worth a conversation before your next contribution.
Can ARC CPA incorporate my business for me?
We work out whether and how to incorporate, write the direction for your lawyer, and set up everything on the accounting and CRA side. Once the company exists, we look after its books and tax from the first day.
Thinking about incorporating?
Send us a note about your business. A conversation is usually enough to tell whether we are a fit, and we will say so either way.
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Your corporation’s return prepared from clean books, walked through with you line by line, and filed well before the deadline.
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