If you are a small business owner, you may be wondering about the benefits of incorporating your business. One significant advantage is the tax benefits that come with incorporating. By incorporating your business, you can potentially reduce your tax burden and save money in the long run. In this blog post, we will discuss the tax benefits of incorporating your business in Canada, with a focus on Toronto and Ontario.
- Lower Corporate Tax Rates
One of the most significant tax benefits of incorporating your business is the lower corporate tax rates. In Canada, corporations are taxed at a lower rate than individuals. The federal corporate tax rate in Canada is 15%, and the provincial rate varies by province. In Ontario, the combined federal and provincial corporate tax rate is currently 12.5%, which is significantly lower than the top personal income tax rate of 53.53%. By incorporating your business, you can take advantage of these lower tax rates and potentially save thousands of dollars in taxes each year.
- Income Splitting
Another significant tax benefit of incorporating your business is the ability to split income among family members. In Canada, if your business is incorporated, you can pay your family members a salary or dividends. By doing so, you can split your income among your family members and potentially reduce your overall tax burden. This strategy is especially beneficial if your family members are in a lower tax bracket than you are.
- Tax Deductible Expenses
When you incorporate your business, you can deduct certain business expenses from your taxable income. These expenses can include office rent, utilities, supplies, and equipment. By deducting these expenses, you can reduce your taxable income and potentially lower your tax bill.
- Capital Gains Exemption
If you sell your incorporated business in the future, you may be eligible for the lifetime capital gains exemption. In Canada, the lifetime capital gains exemption is $892,218 (2021). This means that you can sell your business for up to this amount and pay no tax on the capital gain. By incorporating your business, you can take advantage of this exemption and potentially save thousands of dollars in taxes when you sell your business.
Conclusion
Incorporating your business in Canada can offer significant tax benefits, including lower corporate tax rates, income splitting, tax-deductible expenses, and the lifetime capital gains exemption. However, it is important to note that incorporating your business also comes with additional costs and legal requirements. If you are considering incorporating your business, it is essential to consult with a qualified professional to understand the full implications and make an informed decision.