Introduction
To incorporate or not to incorporate?
Incorporation or setting up a [itg-glossary glossary-id=”2865″]joint-stock company[/itg-glossary] may be an attractive option for you depending on:
- your personal situation (spouse with minimal income and dependents)
- your age
- your career prospects
- your saving capacity
- the regulations adopted by the Ordre des architectes du Québec
Advantages of incorporation
Tax reduction is one of the main advantages of a well-structured incorporation.
Tax deferral
In Québec, according to 2020 tax brackets, the business income tax rates are:
- 0.0% to 53.3% for an unincorporated professional
- 13.0%, 20.5% or 26.5% for a company
A substantial difference that can translate into a tax deferral of up to 35.3% if surpluses are kept in the company.
Income splitting
Paying a dividend to members of your family can be advantageous depending on their situation and their income. However, a dividend paid to a family member is generally taxed at the maximum rate, with certain exceptions. The dividend paid will then be taxed at graduated rates.
The main exceptions for family members are as follows:
- Reasonable dividend for work done
- Work of at least 20 hours per week, done throughout the year
- Company owner 65 years of age or older who pays a dividend to his or her spouse.
Other advantages of incorporation
- Separate and ongoing legal entity
- Payment of life insurance
- Debt repayment
- Limited liability
- Availability of the capital gains deduction
Disadvantages of incorporation
The main disadvantages of incorporation are administrative.
Incorporation and set-up costs
These costs vary according to the complexity of the joint-stock company, with or without a [itg-glossary glossary-id=”2866″]family trust[/itg-glossary] .
Strict regulations concerning the management of the company
Record-keeping, shareholders meetings, etc.
Annual fees
Preparation of financial statements and filing of federal and provincial tax returns.
Separate annual tax filing for the shareholders.
Complex administrative tasks
Separate accounting, tax and accounting oversight, according to the status of the company.
After incorporation
With effective tax strategies, you can optimize your incorporation.
Flexible compensation options
You can opt to pay yourself a salary, dividends or non-registered investments. A combination of these forms of compensation can cover your family expenses and prove advantageous.
Individual pension plan (IPP)
Type of defined benefit pension plan where the contributions are paid by the employer and are tax deductible for the company.
Advantageous investments
Investments made by the company generate income that is taxable according to the type of income: Canadian dividends, capital gains, etc. Keeping after-tax income in the company can be beneficial because of the advantageous tax treatment of investments.
Capital gains deduction
When you sell the shares of your company, you may be entitled to a capital gains exemption under certain conditions. In 2021, the exemption is $892,218.
Be informed
The Financial offers you a turnkey solution by giving you access to all the resources you need and by helping you make the right choices.
Should you incorporate your professional practice?
For more detailed answers and a thorough analysis of your situation, place your trust in one of our advisors.
