Incorporation:

I should point out to you that the Morneau reform brought about certain changes to the incorporation rules. For example, as soon as passive income, i.e. the investments in your corporation, exceed the $50,000 threshold in the course of a year, you gradually lose the benefit commonly known as the “low rate” for every dollar of excess passive income. However, an investment portfolio must be quite big to exceed this threshold, so you’ll have plenty of time to prepare for this eventuality. There are also strategies to reduce this risk. I won’t discuss them here, but I strongly recommend that you talk to your financial advisor about them.

Here is a graph that shows the accumulation of assets of an incorporated professional and an unincorporated professional. In this scenario, we have a 30-year-old professional whose annual professional income is $400,000 and who wants to maintain a cost of living of $100,000 net per year. In both cases, we maximize the RRSP and TFSA each year. We are assuming an annual inflation rate of 2.10% and an annual return of 4.4%.

Source : fdp

At age 65, the net value of the assets after taxes of the unincorporated professional amounts to $9,927,347 while that of the incorporated professional comes to $12,480,262, a clear plus for incorporation.

Since an RRSP was mentioned in this scenario, I should point out that a professional can save for their retirement by contributing to a personal RRSP out of their gross income or by setting up an Individual Pension Plan (IPP). This is one of the many factors that explain the faster accumulation of assets for an incorporated professional.

Despite the Morneau reform, know that your corporation can allow you to split income, under certain conditions. Generally, if you pay a dividend to a family member or related person, that dividend will be taxed at the maximum rate. The only exceptions are:

• if the dividend paid is reasonable for the work performed;
• if the recipient works at least 20 hours per week throughout the year;
• if the owner of the corporation is at least 65 years old and pays a dividend to their spouse.

• Flexibility in the compensation of the shareholder: salary, dividend or advance. Depending on the cost of living, a salary, a dividend, or a combination of both could be considered.
• Life insurance premiums payable by the corporation and tax deductible. A young professional could also transfer life insurance contracts, which he pays for personally with his net income, into the company so that the company pays the premiums out of his gross income. However, an analysis of the insurance contracts is required before doing this since, depending on the contract, there could be a tax impact.
• Possibility of a retirement agreement for the professional.
• Tax-free death benefit of $10,000.
• Protection against ordinary creditors.
• Retirement income in the form of dividends, which are taxed less than income from RRSPs.

The last major benefit I would like to discuss concerns the capital gains deduction if you are incorporated.

The current lifetime capital gains exemption is $971,190 (2023). The CGD can be used when realizing a capital gain on three types of assets, including qualified small business corporation shares. Note, however, that to benefit from this, you have to do this at least two years in advance, because there are certain conditions that must be met. This same strategy is used to crystallize the value of shares during a business transfer, as well as in the estate freeze strategy for business owner succession planning. Again, I strongly recommend that you talk to your wealth management advisor about this.

We have talked a lot about the benefits of incorporation, but there are always many sides to a situation. Incorporation also has its share of drawbacks.

Here are a few:

• The professional will have to pay incorporation fees to set up the corporation.
• There may also be high administrative costs for maintaining the company, since you will have to pay an accountant for the annual bookkeeping, the directors’ resolution, other accountant fees, and possibly lawyer’s fees as well.

In summary, an incorporated professional has slightly more complex taxation and accounting than an unincorporated individual. The structure of the corporation may be more cumbersome and involve more paperwork.