Tax advantages of changing to a corporation for professionals

If you’re a self-employed professional operating as a sole proprietorship, it may be wise to consider making the transition to a corporation. 

If you’re a self-employed professional operating as a sole proprietorship, it may be wise to consider making the transition to a corporation.

In addition to the protection of limited personal liability for debts, you’ll enjoy certain advantages at tax time, including a lower tax rate and the ability to defer taxes.

Learn more about how you can save taxes when you set up your practice as a professional corporation.

Low corporate tax rates

Compared to the taxes you may face as a sole proprietorship (which can exceed 54% when provincial and federal rates for high-income earners are combined) the amount of tax you will pay as a corporation can be significantly less.

Depending on your revenue, your new corporation may qualify for the small business tax rate (“the small business deduction”) on your first $500,000 of business income.

For the year 2016, according to the Canada Revenue Agency website, when the small business deduction is applied, Canadian controlled private corporations will pay 10.5% in federal taxes. The federal government has committed to reducing that rate by .5 % each year until 2019 when it’s fixed at 9%. Provincial small business tax rates are also very low, averaging 3% to 4.5% on top of the federal tax rate – although Manitoba small business owners face no provincial income tax and those residing in Quebec pay 8% tax.

Set up family as shareholders to receive dividends

You may elect to issue shares of your practice to family members so they are eligible to receive income in the form of dividend payments. When incorporating a practice, you as the owner are typically issued “common” or voting shares and the family members are issued “non-voting” shares. Shareholder dividends are usually taxed at a lower rate than other types of income.

Income splitting

You can reduce your tax bill by sharing income among family members. Using this tax saving strategy, the corporation would pay you a salary and pay your spouse or child a reasonable salary as well – providing your spouse or child does work for the practice.

Selling your practice

When the time comes to sell your practice, any proceeds you enjoy from the sale of shares should qualify under the capital gains exemption.  The lifetime capital gains exemption is $824,176 in 2016 and $813,600 in 2015.

To decide if incorporating is a worthwhile move, be sure to talk with a tax expert such as an accountant.

(This information is presented for educational purposes only and should not be considered as tax advice. Be sure to consult with a qualified tax specialist to obtain tax advice specific to your business or personal situation.)

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