Unlike sole proprietorships and partnerships, a corporation has an independent legal personality. Since it exists independently, detached from its owner, it will be subject to legislation that differs from that of the other two modes of business operation. It also has to comply with different rules on company taxation.
A particularly noteworthy aspect for entrepreneurs considering incorporating their business is that incorporation provides many benefits in terms of taxation. Moreover, these benefits explain in part why the joint-stock company is probably the most popular legal form of business.
Discover some of the tax benefits of incorporation.
Incorporated companies benefit from a lower tax rate
Incorporated companies can benefit from a significant advantage that individual companies are unfortunately not entitled to. Business incorporation can reduce taxes on the income generated during the year. This is due to the fact that the tax rate charged to incorporated companies is preferential, as opposed to the maximum rate charged to sole proprietorships.
However, it is important to note that this lower tax rate can't be applied to passive income such as capital gains and rent collections from real estate holdings.
Incorporating your business allows you to defer taxes
Tax deferral refers to postponing the payment of taxes to a later date. This strategy allows entrepreneurs to leave a large portion of their earnings in the company rather than withdrawing a salary or dividends. As a result, they will not be taxed individually on their income, since the money is left in the company. This allows entrepreneurs to take only the money they need from the company. They can withdraw amounts via dividend or salary to meet their personal needs and leave the rest in the company.
The advantage of this approach is that the corporate tax rate is much lower than the personal tax rate. So, if the owner doesn't need capital on a personal level, he leaves it in the company at a lower tax rate and therefore has more money to invest in the end.
Tax exemptions on a sale: an exclusive benefit for incorporated companies
When an owner/shareholder of an incorporated company decides to sell all or part of the shares of his company, he can benefit from attractive tax exemptions on his capital gains.
When shares of a corporation that is incorporated in Canada are sold, a one-time personal capital gains tax credit can be claimed. This tax exemption is substantial, since it can amount to up to $800,000.
Are you considering incorporating your business to reap the associated tax benefits?
Now that you know more about the tax benefits of incorporating a business, you may want to consult with professionals to determine if you should incorporate your SME.
For all questions related to the incorporation of a company in Quebec, you can count on T2inc's experts to answer them. Our team of seasoned tax accountants will be pleased to assist you in all corporate initiatives for the positive growth of your company. Contact T2inc!