If you are thinking about setting up a corporation for running your business these tax planning tips will be helpful.
Taxation of the corporation:
Keep the corporation a small business corporation, so that your shares are qualified for small business shares at all times. This will preserve your ability to claim allowable business investment losses with respect to any loss on the corporation shares and the 750,000 capital gains exemption on any gain. To multiply your access to the capital gains exemption, you can arrange for your spouse to invest in common shares of your corporation. That way you can double available exemption by each one of you claiming $750,000.
Ways of extracting funds from the corporation:
You can use different methods to receive funds from the corporation’s income: Dividends, salary: defer income to the next calendar year by accruing bonuses, payments on loans from shareholders, maximise capital dividend payments, consider a tax free repayment of capital loan to share holder, deemed dividends, shareholder appropriations.
Effect of having a holding company:
Consider the tax benefits of setting up a holding corporation and look into the potential advantages of a corporate partnership. A holding company is often appropriate when you have family members involved in ownership of your share of the business and there are other shareholders not related to you.
Share holders’ agreement:
Where you share the ownership of a private corporation, it is usually wise to have a shareholders agreement. While preparing Shareholders agreement you should consider tax treatment of life insurance payments, the availability of the $750,000 capital gain exemption and the value of shares. It can set out in detail the rights and obligations of the shareholders that go beyond the basic ownership of shares.
Pension plans for small business owners:
If you are a small business owner and you don’t want the trouble of administering a pension plan, you may simply want to set up an RRSP for yourself and ensure that you have sufficient earned income to be able to make adequate contributions.
Investment income earned in a corporation:
You should weigh the potential advantages of incorporating your investments. And at the same time you should be cautious about having investment income in your corporation that carries on an active business. Incorporation will help you to control the timing of dividend payments and thus the timing of income receipts in your own hands, allowing you to maximise old age security benefits, reduce your exposure to minimum tax, manage the timing of dividend and increase your earned income and RRSP contribution room.
Selling the business:
If you decide to sell your incorporated business then there are two ways, sell the assets of the business and sell the shares of the business. If your shares are qualified shares you may be able to claim an exemption for up to $750,000 of your gain on the sale. No capital gain exemption is available to the corporation if it sells the assets.