10 Things To Know When Incorporating Your Business
Mark McGrath, CFP?, CIM?, CLU?
I help Canadian physicians treat financial uncertainty.
Thinking of incorporating your business or practice?
There can be advantages.
But it also makes things a bit more complicated.
Here are 10 concepts to be familiar with:
Salary vs. Dividends
Salary:
Dividends:
Read more:
Small Business Deduction
Active business income <$500k is taxed at 11% in BC.
Income over this is taxed at 27%.
This is called the small business limit.
The tax rates differ provincially - check yours here:
Net investment income over $50,000 or taxable capital over $10,000,000 reduces this limit.
I call it The PIG - the Passive Investment Grind - and I explained it in detail here:
Holding Companies
A corporation without an active business is called a holding company.
Usually, it's used to hold investments, including shares of your active business corporation.
You can normally pay dividends from your OpCo/MedCo to your HoldCo without tax.
If you're a physician - when you retire, you can no longer have a professional medical corporation.
You decommission your professional corporation and convert it to a HoldCo.
Then you can use it to pay yourself dividends in retirement.
Passive Income Taxation
Investments in a corporation generate passive investment income, which is taxed higher than your active business income.
I've written about that in detail, too - read it here:
Notional Accounts
CDA, ERDTOH, NERDTOH, GRIP - huh?
They track various amounts inside your corporation that impact corporate and personal taxes.
You guessed it - I've written about that too:
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Tax on Split-Income (TOSI)
Rules that reduce or eliminate the ability to split income with family members.
Income paid to these parties is taxed at the highest personal marginal tax rate.
Can be avoided in specific situations, like if they work for your practice.
Individual Pension Plans (IPPs)
Create your own Defined Benefit Pension.
Can only be used if you pay yourself salary - not dividends.
Here's my thread on IPPs:
Corporate-Owned Life Insurance
Life insurance can be owned by your corporation.
That means using cheaper dollars to pay for it.
And the death benefit can still be all or mostly all tax-free.
Here's more on the topic:
Estate Freezes
Can be used to introduce new shareholders to your corporation, including children, spouses, or family trusts.
Allows the company's future growth to accrue to the next generation without relinquishing control of the company.
At a high level, you swap your common shares for fixed-value preferred shares.
Then you issue new common shares to family or a trust.
This locks in the value of your preferred shares, which you can redeem over time.
All new growth accrues to the newly issued common shares.
Multiple Wills
Only useful in BC and Ontario.
Probate is required when a third party, like a bank or financial institution, holds any of your assets on death.
This includes things like bank account balances and non-registered portfolios.
In BC, probate fees are 1.4%.
On a $10M estate, that's $140,000.
If your executor is filing for probate - everything that is probatable must be on the application.
Including the market value of the shares of your corporation.
Multiple wills can be used to separate assets not held by a third party, like art and jewelry, and shares of your company.
This means probate fees can be avoided on your shares - often your most valuable asset.
Corporations are complex.
But when used effectively, they are powerful.
Work with your accountant and your advisor - or me - to understand if incorporating your business or practice is right for you.