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ADVERTORIAL
DOLLARS & SENSE

Is Incorporating your Business right for you?

The act of incorporation creates a new legal entity separate from you keep the funds in the corporation the larger the tax deferral
yourself. Your corporation will have certain rights, obligations, advantage will be. If your business is not quite profitable enough you
including the ability to acquire assets, obtain a loan, enter into may consider using the business losses to offset against your personal
contracts, incur legal liability, and carry on a business. Once you income from other sources.
incorporate, the corporations assets belong to the corporation and not Is your business expanding and do you require more funds to
its shareholders. There are many advantages and disadvantages which operate successfully? If so, incorporating may make sense since
are not entirely detailed but hoping this article gives you a very good, raising money is often easier for corporations than sole proprietorship
brief overview. or partnership. Is your business producing more income than it
There are many advantages of Incorporating - one of the specific needs to operate? Incorporation may make sense as you may be
advantages of incorporation is the potential to defer income tax. able to take advantage of lower corporate tax rates and the resulting
Income splitting, the Lifetime Capital Gain Election, Flexibility tax deferral advantage by leaving the after-tax business income in
in remuneration and employee benefits as well as limited liability, the corporation until you need it. In this regard, you may want to
better access to capital and continuous existence are other important ensure that passive investment income earned in your corporation
considerations. does not grind down your business limit. Alternatively, you may be
While incorporating your business may provide these able to benefit from income splitting opportunities such
advantages, a corporation is also subject to greater as paying your adult family members dividends to take
regulations and compliance than a sole proprietorship advantage of their lower marginal tax rates, provided the
or partnership. It is a separate legal entity and therefore TOSI (tax on split income) rules don’t apply.
requires individuals such as shareholders, directors and Do you need additional money to supplement your
officers to carry out business activities on its behalf. This retirement? By incorporating, you have increased
creates a more complex structure. flexibility in choosing the type and amount of
For instance your corporation will have to hold annual remuneration you can receive in retirement. You can
shareholder meetings and maintain corporate records. chose to leave the funds in your corporation to invest,
If there are any changes to the board of directors your or have your corporation set up an Investment pension
corporations have to file notices with the government. plan or Retirement Compensation Agreement. This can
Erica Tennenbaum, CFP, FCSI provide pension benefits and supplemental retirement
The admininstrative, legal and accounting costs with Senior Portfolio Manager & income.
estabilishing and maintaining a corporation are usually Wealth Advisor
higher due to the requirement to file documents – articles Do you intend to leave your business to other family
of incorporation with the government, an annual corporate tax return members or sell it? If so, incorporating your business may make
as well as T5slips for dividends paid. sense for you. The corporation continues to exist after your death and
the shares can be passed along to your heirs as you wish. Even if your
Keep in mind that in the first few years of operation, a business may heirs don’t wish to continue the business, they may still benefit from
generate losses due to high start-up costs. As a sole proprietor, you tax deferral by leaving the assets in the corporation to invest. If you
may use any business losses to offset your personal income from plan to sell your business, you might be able to take advantage of the
other sources. However, once you incorporate, any business losses Lifetime Capital Gain Election to eliminate the tax on all or a portion
realized in the corporation must be applied against corporate income of the gain on the sale of the shares.
and cannot be used to offset personal income.
In summary, deciding how to structure your business is an important
All the business income you earn annually as a sole proprietor is decision so be sure to speak with your qualified tax and legal advisor
taxed in your hands. You can use the after tax profits as you wish to ensure incorporation is right for you.
whereas with the corporation those profits belong to the corporation
and cannot be used for personal use unless withdrawn as dividend, This article is a brief overview- if you would like to read the full
salary or bonus from the corporation. article please view on our website; erica.tennenbaum@rbc.com
A few points to consider whether to incorporate – do you require a The information in this article is not intended to provide legal, tax
substantial portion of your business income to fund your living or insurance advice. To ensure that your own circumstances have
expenses – if so incorporating may not make sense. One of the key been properly considered and that action is taken based upon latest
advantages of incorporation is the tax deferral of income – the longer information available, you should obtain professional advice from
your qualified tax and legal advisors.

This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest
available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness.
This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information
suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate
entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under licence.
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