What are Some of the Tax Benefits of Incorporating a Business?

Business owners often decide to incorporate their business because of the tax benefits of incorporating. Depending on your circumstances and the Province in which your corporation operates, one of the main tax benefits of incorporating may be access to lower corporate tax rates, including the Small Business Deduction, and access to the Lifetime Capital Gains Exemption.

Small Business Deduction

The Small Business Deduction is a reduced tax rate that applies to a portion of the active business income of Canadian Controlled Private Corporations. In order to access this reduced tax rate, the business must be incorporated and cannot be controlled by non-Canadian residents. In addition, the business must be a Private Corporation with relevant restrictions on the transfer and ownership of shares.

In order to access the Small Business Deduction, income must remain in the corporation at the end of the financial year for tax purposes. As a result, generally speaking, after a small business is incorporated, the business owners can realize tax savings once the corporation's operations generate more income than they need personally. Profits which remain in the corporation are taxed in the corporation at the lower rate.

Lifetime Capital Gains Exemption

An exemption from the application of capital gains tax can be available upon the sale of Qualified Small Business Corporation shares in certain circumstances. Only incorporated small businesses can access this exemption, so your business must be incorporated in order to take advantage of this potential tax benefit.

Articles on this blog are general in nature and are provided for informational purposes only. Use of this blog does not provide or replace individualized legal advice and does not create a solicitor-client relationship with our firm. Users who require legal advice on a particular matter should consult directly with Mr. Eric Cohen, Barrister & Solicitor, an Ontario lawyer or a competent lawyer in their Province or State.


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