Incorporating is a big decision, accountant warns Nicole Cahoon, CPA
With small business month just around the corner in BC, one local accountant is addressing the question that every business owner must at some point consider: is it time to incorporate?
While the motivations and potential benefits (and drawbacks) to incorporating are going to vary for each business owner, Chartered Professional Accountant Nicole Cahoon says the answer generally comes down to one major factor.
“If you’re earning more income from your business than you need to draw from it, it’s generally a good time to have that discussion with your accountant,” says Cahoon. “One of the main reasons to incorporate is the lower corporate tax rate compared to personal marginal rates, which is what you pay as a sole proprietor or partnership. If your business can retain earned income within the corporation, you can defer tax to future years on that income to the extent that it’s not distributed to you as a salary or dividend.”
Further reducing those taxes on corporations, she says, is the federal small business tax deduction. That deduction applies to the first $500,000 of “active business income” earned by a Canadian-controlled private corporation. Cahoon notes, however, that there are some exclusions to the deduction, such as property income and income earned through a Personal Service business.”
“It’s really important that if you’re thinking about incorporating you talk to your accountant to make sure you fully understand the tax implications and how they apply in your case.”
Another factor that may affect the decision to incorporate or not is the legal protection a corporation can provide. Here too, however, Cahoon warns that the protective shelter of a corporation may not extend as far as many people think.
“A corporation won’t protect you from all forms of liability,” she says. “Generally speaking, your liability is limited to the amount you invest in the company for your shares. In some situations, that protection disappears altogether, like if you guarantee a loan for the corporation or there’s GST or payroll tax owing to Canada Revenue Agency.”
Even once the decision to incorporate is made, it’s not necessarily a simple affair, as rules regarding the transfer of capital assets and the sale of shares could have serious tax implications and should be carefully considered.
“At the end of the day, incorporating your business is a complicated process,” says Cahoon. “I’d caution anyone considering incorporating to seek professional advice to ensure the resulting corporation is structured appropriately. With appropriate planning alongside your accountant, incorporating can be extremely advantageous.
Earning trust & building relationships Nicole Cahoon, CPA
Nicole Cahoon knows that lasting relationships are the key to success – both for her and her clients – and she takes that to heart every single day.
“Customer service is a huge part of what we do here,” says Nicole. “My clients need to be able to trust me enough to tell me things about their finances and life situation.”
That trust is so important, she says, because whether for corporate or personal taxes, information is a critical part of making good decisions.
“For example, if I don’t know you have a child with a disability, I can’t advise you about the tax credits and deductions that are available,” she says. “If I don’t earn your trust, it impacts my ability to optimize your after-tax position. I want my clients to ask questions and tell me things – that’s how we build relationships.”
Nicole’s philosophy of customer service applies to the full range of services she offers, from cash flow analyses and bookkeeping for businesses to tax preparation and estate planning for individuals. She also offers a range of business consulting services focused on improving profitability and efficiency, and developing growth strategies by providing business valuation, succession planning and mergers and acquisitions services and information. For more information on Nicole Cahoon, CPA, visit www.nicolecahoon.com or look for her on Facebook. Nicole can be reached at email@example.com or 250.871.1121.
Tax Tip – First – Time Home Buyers Tax Credit – the HBTC is a non-refundable tax credit, based on an amount of $5,000, for certain home buyers that acquire a qualifying home. To be eligible you must not have lived in another home owned by you or your spouse in the year of acquisition or in any of the four preceding years. In addition if you are a person with a disability or are buying a house for a related person with a disability, you do not have to be a first-time home buyer. However, the home must be acquired to enable the person with the disability to live in a more accessible dwelling or in an environment better suited to the personal needs and care of that person. Fore more information, please call our office 250-871-1121 or email firstname.lastname@example.org
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Tax Tip – The Lifelong Learning Plan (LLP) allows you to withdraw from your RRSPs to finance full-time education for you or your spouse or common-law partner. You cannot participate in the LLP to finance your children’s training or education, or the training or education of your spouse’s or common-law partner’s children. For more information contact our office at 250-871-1121 or email firstname.lastname@example.org
Family Tax Cut -Under Canada’s tax system, federal personal income tax rates increase with the level of taxable income of the individual. As a result, a couple in which one individual has a higher taxable income than the other often pays more federal income tax than a couple where both individuals have equal taxable income.
The October 30, 2014 announcement included a proposal to introduce the Family Tax Cut, a new non-refundable tax credit of up to $2,000 for eligible couples with minor children based on the net reduction of federal tax that would be realized if up to $50,000 of an individual’s taxable income was transferred to the individual’s eligible spouse or common-law partner. This would take advantage of a spouse’s lower income tax bracket. www.cra-arc.gc.ca For more information please contact our office at 250-871-1121 or email email@example.com