Consider Incorporation to Lower Your Tax Rate

by Craig Anthony

1 min read

Incorporating your business legally separates you from the business. This business structure protects you from liability and financial standpoints, and in some cases, it can also lower your tax rate. If you have an unincorporated business, all of the business profits are considered to be your personal income. You report that income on your T1 tax return, and you pay both federal and provincial income tax on it. As of 2017, you pay 15% income tax on the first $45,916 of income, but the Canada Revenue Agency taxes earnings over that threshold at a higher rate. The highest federal income tax rate on personal income is 33%. In contrast, if you incorporate your business, you pay yourself a salary, and you pay income tax on that salary as usual. The business keeps any other profits, and it pays taxes on them. In Canada, the federal tax rate on corporate income is 38%, so at first glance, it looks like you don’t save any money by incorporating. In reality, that number is a bit deceptive. Many corporations qualify for the general tax reduction, which brings the tax rate down to 15%. If your business is a Canadian-controlled private corporation, it may also qualify for the small business deduction, which further lowers the tax rate to 10.5%. That rate is significantly lower than any personal income tax rate. If you decide to incorporate your business, you inherently change its structure and the way the CRA sees its profits. This transition does not directly change your personal income tax rate, but it allows you to keep more money in the company; in turn, those funds face a lower tax rate. Ultimately, incorporation can help you save money so you have more to reinvest into the growth of your company.

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