You’re running a successful business. You’re making money. You’re re-investing in inventory, capital assets, and retirement savings.

Everything is going great. That is, until you file your tax return.

Entrepreneurship is fraught with ups, downs, and all sorts of surprises. One of the biggest surprises is the rate of tax paid by unincorporated business owners such as sole-proprietors or partners of a partnership.

In Ontario, unincorporated business owners pay tax at astronomical rates. Let’s look at a couple examples:

  • Profits of $100,000 or more: 43.41%
  • Profits of $155,000 or more: 47.97%
  • Profits of $223,000 or more: 53.53%

Yes, you can actually pay the MAJORITY of your marginal profits to the tax-man, depleting the pool of cash left-over for business expansion and retirement savings.

The solution to this problem is: Incorporating your business.

By incorporating your business, you can access flat, corporate rates of income tax as low as 13.5%, allowing you to re-invest, grow, and save for a comfortable retirement. That is a savings of up to 40.03%, or quite literally a 300% increase from the corporate tax rate.

For example, say Mr. C runs an IT advisory business where he regularly services 5-6 ongoing contracts and often sells his clients both services and products. Mr. C only requires about $54,000 to maintain his personal lifestyle and wants to rapidly grow his business through re-investment.

Below are Mr. C’s current financial figures as a sole-proprietor:

Pre-tax Income $185,000
Tax and CPP payable $66,895
Lifestyle requirements $54,000
Profits available for investment $64,105
Average tax rate 36.16 %
Marginal tax rate 47.97 %

Now, what if Mr. C was instead operating his business under a corporation?

He requires about $54,000 annually to maintain his lifestyle and is interested in retaining the remainder of his profits in the corporation to finance business expansion and retirement savings.

Pre-tax Corporate Income $185,000
Corporate taxes $24,975
Dividends to Mr. C $60,000
Personal taxes to Mr. C $5,796
Total taxes paid $30,771
Profits available for investment $94,229

As you can clearly see from the simple example above, Mr. C is in a much better position as an incorporated business. In fact he was able to increase the capital available to reinvest in his business by about 47%.

In addition to the tax benefits the corporation allows Mr. C the ability to creditor-proof his personal assets along with a whole host of other benefits we’ll cover in subsequent articles.

So how do you incorporate a business?

Well, it’s not that easy. If you’re already running an unincorporated business then you’ll need a qualified CPA that works with a qualified small business lawyer. Together, these professionals will ensure your corporation is setup properly and help you avoid the many tax pitfalls that small business owners frequently find themselves in when things aren’t done properly.

At Campanella McDonald LLP we help hundreds of small business owners like yourself properly structure their businesses to optimize their tax savings. Give us a call today and we will book an introductory meeting to get you on the right path to growth and tax savings.