Incorporation – Tax Deferral.
A common misconception about incorporating a business is that it will provide immediate tax savings. This thinking is understandable if we are simply comparing small business corporate rates in Manitoba (9.0%) to personal rates (between 25.8% and 50.4%). However, the difference in tax rates only provides temporary relief – a potential for tax deferral.
The reason it is a tax deferral rather than true tax savings is because, generally speaking, earned income that is moved from your corporation to your personal accounts then triggers personal tax rates. So, anything earned and then distributed for personal use will be taxed at higher personal rates depending on your marginal tax bracket. Depending on how much of your business income is needed at the personal level to pay the bills, it may not be worthwhile, strictly from a tax perspective, to incorporate. Profits that can be left in the corporation, to be re-invested and used to grow the business – are efficiently taxed at the lower corporate rates.
Of course, there are other reasons to incorporate a business that may include limited opportunities to split income and liability protection. There are costs associated with setting up a corporation, as well as annual maintenance costs that must be considered. Bookkeeping and filing are more rigorous for a corporation, so proper steps should be taken to keep everything organized from day one.
Check out the publication on our website “Proprietor vs Limited Company Decision” for more info on this subject – or feel free to set up a meeting to discuss your specific situation with someone at our office.