More and more real estate professionals are looking at incorporating to reduce taxes and increase wealth accumulation.
Incorporating your business is an excellent way to accomplish both if you are at the right tax bracket and can leave money in the company for investment purposes. Listed below are the top eight reasons to consider incorporating your business.
- Limited Liability:
Protects you against creditor claims and any lawsuits or other liabilities arising in the corporation.
- Small business tax rate 13%
Individuals must pay tax on all income at year end at a maximum 54% marginal tax rate. Monies left in the corporation are taxed at 13% - a difference of 41%.
- Building wealth within the corporation
You can use the tax spread 41% (54% - 13%) to accumulate wealth.
For example, if your net income is $300,000 and you can leave $100,000 in the corporation
Corporate after-tax accumulation is $87,000
Personal after-tax accumulation is $46,000
Net wealth accumulation is $41,000 more than non-incorporated.
This money can be used to re-invest in real estate, stock market, bonds or other business ventures.
- Tax Deferral
Corporations can bonus-out profits at December 31 as long as the payments are made within 180 days of the year-end of the corporation. This effectively defers taxes to the next year.
- Employee benefits
Depending on your circumstances, it may be advantageous to have your corporation pay for your automobile.
Depending on your circumstances, it may be advantageous to have your corporation pay for your health care premiums.
You have the option of setting up an IPP through your corporation to build up a company pension plan for your
- Individual pension plan (IPP)
retirement. This is not possible for an unincorporated individual.
- Estate freeze
When appropriate, you can transfer future growth of your business to your spouse (tax free) and children at minimal taxes.
- Income splitting
Family members can be put on payroll within the new guideline set out by CRA; the benefit of this approach is that income can be allocated to family members who have lower incomes and accordingly lower tax obligations.
- Capital gains exemption $848,000
Within the CRA guidelines, you can sell your company for up to $848,000 tax free.
When to Incorporate
The key to self-incorporation is leaving excess funds in your corporation and doing your investing through the corporation. If you are at a high tax bracket and can leave money in the corporation it generally makes a lot of sense to incorporate.
As a rule of thumb for every $20,000 you can leave and invest through your company you will save over $8,000 in taxes, assuming you are at the highest marginal tax bracket. Similarly if you had $100,000 which you could leave in the Corporation for investment purposes, you increase your investing power by approximately $41,000; a dramatic improvement in your investing power.
Self-incorporation is not appropriate for everyone. It makes the most sense if you are at a high marginal tax bracket and have extra funds for investment purposes. To find out more about the costs and benefits of self-incorporation and see if it is right for you, reach out to your tax advisor for more details.
ABOUT THE AUTHOR
William Deneault, CPA, CA
William Deneault is a CPA, CA who works with real estate professionals and high income individuals advising on tax planning and business matters. To contact William email him at firstname.lastname@example.org or call: 416-962-2186