For a long time, our firm has been using revenue of $100,000 and $200,000 as a general benchmark for deciding whether or not to incorporate. Below $100,000 not, and above $200,000 yes, and anything in between, it depends.
Maybe we should amend our old numbers due to inflation, but the choice is more complicated than that.
TAX ADVANTAGES
1. More to invest after tax
Ontario corporations pay tax at 12.5 % on the first $500,000 of income, while personal income at the top tax bracket above $220,000 is taxed at 53 %.
If you don’t need to spend all your income, the more than 40% in tax savings stays in the corporation and can be used for investment purposes. The fact that PREC can earn investment income in the Corp either investing in real estate or stock portfolio is a great advantage.
2. Possible tax deferral
Corporations pay tax when earned (the accrual basis) and individuals pay tax when received (cash basis). A corporation can choose its first fiscal year end to be any date (as long as its within 53 weeks of incorporating). For this reason, having a July or August year-end, allows for the payment of a year-end bonus that would fall early into the next taxation year personally.
A corporation is allowed to expense a year-end bonus, which is salary to himself when declared, and pay tax personally when received, as long as paid within 6 months. With a PREC you would receive a salary from your own corporation and receive a T4 for personal tax filing purposes.
Another advantage of a summer year end is your accountant will have your year-end done before the end of December, and we may choose to pull some income forward to the current year if there’s an opportunity to declare income in a lower bracket.
3. Income splitting
A spouse, parent or child can own non-voting, non-equity shares and receive dividends which, if they are taxed at a lower rate would reduce the family’s overall tax.
There are rules called TOSI introduced recently that are designed to stop this, but the work around for this to be allowed, is the family member must work a minimum of 20 hours a week.
4. Holding company
A holding company owned by the principle is allowed and if desired, income from the active business (PREC) can pay tax free dividends to the holding company, and eliminate exposure to creditors of the active business. More importantly a holding company for the sale of the business mentioned in point 5 is a big advantage.
5. Lifetime Capital gains exemption (currently $883,384)
The sale of shares of a corporation are eligible for a tax-free capital gain. This would only apply to the agents shares and not the family member(s). The timing of the sale and the payment can be at different times.
Sales are usually not done to the succeeding agent but to his holding company (point 4 above). That way the eventual source of funds, would be a tax-free intercompany dividend from the active company (PREC) to the holding company of the future profits.
Effectively, the purchase is paid with low tax paid profits (taxed at 12.5 %). This would be more likely used by a broker that had a team.
TAX DISADVANTAGES
Cost of incorporating and additional accounting fees for corporate filings of $2,000 to $5,000.
