Definition of corporation
A corporation is a legally establish business that can own assets and incur debt. Choosing to incorporate affects your business's operational, accounting, tax and legal requirements.
A corporation is a legally established entity that can enter into contracts, own assets and incur debt, as well as sue and be sued—all separately from its owner(s).
Because it is defined by law, a corporation can technically exist forever. This means that if the owner dies, the company can continue as an operating entity—unlike in partnerships or sole proprietorships where company assets may be tied up in estate and taxation issues.
Of all the decisions that come with owning a business in Canada, one of the most important is choosing its structure. Making your company a sole proprietorship, general partnership or a corporation will involve different legal and tax obligations, as well as changing operational and accounting guidelines that you may need to follow.
Why incorporate your business?
Whether you started as a sole proprietor or are launching a new venture, the reasons to incorporate can vary. You may want to:
- legitimize your business’s name and reputation
- keep your personal assets separate from your business liabilities
- grow a large business you could someday sell to other owners (and benefit from the Lifetime Capital Gains tax exemption)
- take advantage of lower corporate tax rates
- raise a large amount of capital from investors (who normally invest in corporations)
- borrow money for your business from financial institutions at lower interest rates
- be able to sell shares of your business
- have your fiscal year-end fall outside the calendar year
- keep money in the business to defer paying personal income tax
What are the advantages and disadvantages of incorporating?
The chart below lays out the implications—from an operating, accounting, taxation and legal standpoint—of creating a corporation.
|Features||Pros and cons|
Multiple owners whose ownership percentage is determined by how many shares they hold. There is typically lots of structure and formality in a publicly traded corporation, along with high administration costs.
Shared decision-making under the guidance of a board can hamper flexibility but it increases accountability and a company’s ability to raise capital.
Revenues, expenses and cash flow management are all tracked internally by professionals, with additional professional support from outside.
Publicly traded corporations must report their results publicly through audited financial statements and detailed disclosures.
Subject to progressive tax rates (the tax rate goes up as income increases) established by federal, provincial and municipal authorities.
Corporations have few limits on the expenses they can deduct for taxation purposes. They pay tax on earnings before tax at established rates. Net income that is distributed to owners is then taxed again at their personal rates.
Owners’ liability is limited to their investment. Capital can be raised without exposing owners to unlimited liability.
A corporation’s limited liability means that if the company is sued, personal assets of the owner or owners cannot be seized to settle the claims.
How do you register a corporation in Canada?
It’s simple to set up a corporation in Canada. You can incorporate your business federally through Corporations Canada or incorporate in your province or territory.
To incorporate a business, you will need:
- a business name
- articles of incorporation (business name, share structure, number of directors, any restrictions you want to set)
- a registered address
- a board of directors
You can submit the documents and pay the fee online.
Corporations need to file an annual return online to avoid a potential administrative dissolution of a business.
Once you’re incorporated, you’ll receive a nine-digit business number, which will serve as your business’s standard identifier with the CRA.
Whether you’re a sole proprietor or a corporation in Canada, generally if you earn more than $30,000 in a year, you will need to register for a GST/HST account and remit GST/HST payments to the CRA.
Should I incorporate federally or provincially?
There are some advantages to incorporating in your province or territory, including:
- having less competition for the name of your business
- incorporation costs and tax rates can be lower
Registering federally also has its benefits:
- It allows you to carry out business anywhere in Canada.
- It provides heightened name protection and often brings greater global brand recognition.
You may want to consult an accountant or lawyer in your province or territory to discuss the best option for your business.
If you decide to register federally, you will also need to register your federal corporation in provinces and territories where you conduct your business.
Who owns a corporation?
Unlike sole proprietorships, a corporation can be owned by multiple people.
- A shareholder is a part owner of a corporation. A majority shareholder holds more than 50% of the company’s shares.
- A director manages the corporation and may also hold shares.
- A business owner owns the company but does not necessarily direct the day-to-day operations.
What are the tax implications of incorporation?
One of the biggest impacts of incorporating a business involves tax rates.
When your business is incorporated, its profits and losses are not automatically passed along to you as a business owner. You can pay yourself a salary as an employee of your business (and be taxed at an individual rate for the income you receive) or you can pay yourself in dividends, which comes with a reduced tax rate.
It’s advantageous to keep as much money in the business as possible, in order to pay the reduced corporate tax rate. If an owner is withdrawing in salary or in dividends all the earnings the business brings in, there is no advantage to incorporating, since net income that is distributed to owners is then taxed again at their personal rates. However, if money remains in the business to invest in equipment or other assets, real tax savings will be experienced, since a corporation pays taxes on its profits at a lower tax rate than individuals.
Here’s a snapshot of how tax rates differ between self-employed business owners and corporations in Canada:
Individual and sole proprietor federal tax rates in Canada
|Individual/sole proprietor earnings||2022 tax rate|
Tax rates and earning thresholds may vary from year to year and from one province or territory to another. Up-to-date rates can be found on the Canada Revenue Agency’s website.
Federal corporate tax rates in Canada
Corporate tax rates are more complex and variable than those of sole proprietors. Rates are subject to a series of reductions for eligible businesses. You’ll note that the basic federal tax rate for corporations is 38%, but most Canadian businesses are entitled to reductions that can reduce the rate to as low as 9%.
The rates in the table below are a sample of the possible tax rates and deductions.
|Deductions||2022 tax rate|
|Basic tax rate for corporations||38%|
|After federal tax abatement||28%|
|After general tax reduction||15%|
|After claiming small business deductions||9%|
Up-to-date rates can be found on the Canada Revenue Agency’s website.
As an owner of a corporation, you’ll need to consult an accountant or tax lawyer to understand your tax obligations—and benefit from appropriate corporate reductions.
Another benefit for corporations is having the flexibility of a fiscal year. While sole proprietors must calculate their earnings and expenses in the calendar year, if your business is incorporated, you can choose any month to begin a fiscal year. That means personal income can be deferred to another calendar year.
Corporations also have few limits on the expenses they can deduct for taxation purposes. They pay taxes on earnings before tax at established tax rates.
While there are some helpful tax advantages to incorporating, the accounting process is significantly more complex than for sole proprietorships. Recordkeeping must be meticulously managed to track every dollar coming in and out of the company, including transfers, assets and liabilities.
Where to get tax advice as a corporation?
Courtney Tummon, a manager in the Liaison Officer Section of the Compliance Programs Branch at the Canada Revenue Agency (CRA), says business owners can receive customized information about their tax obligations via a free one-on-one visit with a CRA Liaison Officer.
“We want to help small business owners understand their tax obligations and answer questions so they can meet those obligations. Anything a business owner chooses to discuss with a liaison officer is 100% confidential and will not be shared with any other areas of the CRA or anyone else. A visit from a Liaison Officer will not result in being reassessed or audited.” she says.
Do you need to be a corporation to get a business loan?
The short answer is no. However, in order to open a business bank account or to secure a business loan or line of credit, you will need to register your business with the government. Sole proprietorships and general partnerships can do this without incorporating.
What are the legal implications of incorporating?
One of the benefits of owning a corporation, as opposed to a sole proprietorship, is that a business owner or shareholder can legally separate themselves from the corporation. This means that its owners can’t be held personally responsible for any debts or lawsuits the business incurs. Personal assets, like a house or vehicle, cannot be seized, unless the owner has given a personal guarantee. Incorporation also limits the liability of any shareholder who has not signed a personal guarantee—creditors can’t sue them for any of the business’s liabilities.
However, if a director fails to deduct, withhold, remit or pay tax amounts, for example, GST collected, CPP withheld, income tax and Employment Insurance from employees, they can be held personally responsible for making sure these monies are paid to the CRA.
How do you dissolve a corporation?
For provincially/territorially incorporated businesses
If you incorporated your business in your province or territory, contact the appropriate governing body and follow the steps to dissolve your corporation.
For federally incorporated businesses
If your corporation has shareholders but no property or liabilities, shareholders can approve the dissolution by special resolution. If a corporation has no shareholders because no shares were issued, the directors can pass a resolution that authorizes its dissolution. If your corporation has property and liabilities, they need to be sold before the corporation can be dissolved.
Once you’ve determined the correct path, you can fill out and submit your articles of dissolution online. Or you can complete and sign a Statement of Intent to Dissolve and submit it to Corporations Canada.
When you file your corporation’s final tax return, Tummon advises sending the CRA a copy of the articles of dissolution. “Otherwise, we would still consider the corporation to exist, and you would have to file a return, even if there is no tax payable.”
“You may also need to file forms associated with GST/HST or payroll to close or de-register those accounts. You will also need to complete and file any T4 or T4E slips and summaries within 30 days of the day your business ends.”
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