When should a self-employed individual incorporate?
By: Nelson Huang, CPA, CMA, CA
The purpose of this article is to outlines some factors that will make it favourable for an individual who is self-employed to incorporate his/her business. (If you own real estate, please note that only some of the information would be relevant.)
- If your business generates a net profit that is significantly more than your personal cash needs, then incorporation would allow for a tax deferral.For example, say your business net profit is $100,000 per year, but you only need $55,000 for personal spending. You could take out a salary of $75,000 to cover personal cash needs as well as the income and payroll taxes. The remaining $25,000 is taxed at 13% for BC’s active business corporate rate versus the personal marginal tax rate of 38% in BC (effective 2016).However, you should also take into consideration of RRSP and TFSA, which may reduce the benefit of incorporation.
- As a self-employed individual, you have to pay both employer and employee’s portion of CPP (a payroll tax). The 2017 rate is 9.9% up to $5,128. Incorporation would allow you to be paid a dividend instead of salary. A dividend is not subject to CPP, which means you could potentially save up to $5,128 and invest it into something else. A qualified investment advisor should be consulted in all investment decisions.
- If you have a spouse, children over 18 years old or a close-family member that needs your financial support, then incorporation would allow for income splitting. That is, corporate dividends could be paid to shareholders instead of using your after-tax personal cash to pay them.
- If you want to protect your personal assets from your business operations, then incorporation may limit your legal liability. A lawyer should be consulted for all legal advice.
- If you want to sell your business eventually, selling the shares of your corporation may qualify you for the Lifetime Capital Gain Exemption, which is at $824,176 as of 2016 (and the amount is indexed for inflation). This means that any gain that is under the exemption would not be subject to income tax. (It might trigger Alternative Minimum Tax, but you’re still getting a good deal.)
Want to learn more about incorporation?
Join Winright Law and our guest, Nelson Huang, CPA, CMA, CA on Tuesday, March 26 for an in depth discussion on the top tax strategies for incorporated businesses.
Learn about potential tax benefits and which business structures are ideal for incorporating.
There will be ample time for questions with our expert speaker to address your concerns.
This seminar is for businesses from a variety of sectors, including real estate, health professionals (doctors, pharmacist, dentists, physiotherapists, chiropractors etc.), consulting, education, hospitality, retailers and manufacturers.
Nelson Huang, CPA, CMA, CA – Chartered Professional Accountant
Nelson’s attention to detail, quick turn-around time and proactive communication have earned him the trust of his clients. Nelson genuinely cares about his clients and seeks to build long-term relationships with them. In terms of taxes, he helps his clients to maximize their savings while remaining compliant with the law. In terms of accounting, he helps his clients to understand their financial performance and to prepare financial statements with integrity. In terms of advisory, he helps his client to make informative decisions and to resolve challenging matters effectively.
Nelson has been helping individuals, business owners and charities with their accounting and tax since 2008. As an entrepreneur, he loves to work with self-employed individuals and business owners. As a practicing Christian, Nelson also loves to work with non-profit organizations to help build a better society.
Nelson currently volunteers with Missions Fest Vancouver, Tenth Church and the Community Volunteer Income Tax Program (CVITP). He is also taking biblical studies part-time at Regent College.
Nelson received his Certified Management Accountant designation in 2009 and his Chartered Accountant designation in 2011. He is deeply thankful for the work experience he has obtained with AY Au-Yeung & Company LLP and MNP LLP (formerly KNV LLP). Nelson also holds a Bachelor of Commerce from UBC Sauder School of Business.
During his spare time, Nelson likes to meet new people, travel, volunteer and swim.