Much has been said of the tax benefits to incorporating a small business, however, the benefits of operating as a Sole Proprietor (not a Corporation) are seldom highlighted.
1) Sole Proprietors maximize their RRSP contribution room providing an opportunity for tax advantaged investing in their future. Paying a salary from a corporation will also contribute, however, receiving corporate dividends does not. (This advantage is currently maximized at approx. $150,000 in earnings).
2) Sole Proprietors maximize their contributions to CPP providing for a future retirement pension. Paying a salary from a corporation will also contribute, however, receiving corporate dividends does not. (This advantage is currently maximized at approx. $56,000 in earnings).
3) If you incur business losses, Sole Proprietors can apply losses against other income. Corporations can only apply losses against past or future income of the corporation.
4) The professional fees incurred when starting a corporation in addition to the yearly cost to file an annual return under the Corporation’s Act and to file a Corporate tax return can outweigh the tax savings of incorporating.
Small Business Corporations in Canada have been the target of tax changes recently, making it more difficult to rely on long term corporate planning. Significant areas of change have been income splitting, passive investments, and selling a business.
There are non-tax reasons for incorporation as well and every situation is unique; if you are considering incorporation, professional advice is highly recommended.
