There are potential tax benefits to incorporating. As a company owner, you can pay yourself a salary or a dividend (share of profits). In either case, you must pay personal income tax on this, which is separate from the business tax filing—once a business has been incorporated, its expenses, etc. are no longer claimed on your personal income tax. Your corporation then deducts your salary as a business expense, lowering the amount of corporate tax you will pay. Corporate tax rates are also lower.
However, in Canada, because of the principle of tax integration, you will pay the same amount of tax, whether you are incorporated or not, if you take all the profits out at the end of the year. So, being incorporated is only advantageous if you leave part of the profit inside the company (for example, to pay employees or invest in new equipment). That’s why incorporating is usually only advantageous for larger companies.
The cost to incorporate in Canada
Becoming incorporated has both direct and hidden costs. You can register in your province or territory (if that’s the only place you do business) or you can register federally (if you do business beyond your province or territory). The process of being incorporated provincially is less complicated, and therefore less costly, than incorporating federally. Note that if you incorporate federally, you must still incorporate in the province or territory where you’re based.
The federal fee to incorporate is $200, and you can pay it online. The cost of incorporating in a province or territory varies. To register a corporation in Ontario, for example, the fee is $300, plus $60 to register a business name, which you must do before you incorporate.
However, there are other costs to incorporating, and these can be considerable. “I had to hire an accountant to help me incorporate. There were a lot of government documents involved and I found it difficult to decipher what the requirements and responsibilities were,” says Guillot. “It got expensive very quickly.”
It also takes substantial time to figure out how the incorporation process works and make sure you are satisfying all the requirements. You must create a board of directors, get authorization for your company name and define a share structure, for example. “It’s not something you can do in an afternoon!” says Guillot.
If you want support throughout the process, an accountant or lawyer can help, or you can hire a company that specializes in helping businesses incorporate, such as Ownr (an RBC Ventures company) or Incorp Pro. They offer a menu of services, starting at a few hundred dollars.
Administrating an incorporated business is also more complicated than being a sole proprietor.