Q. Should I incorporate my business?
A: The conversion to corporate form may be based on tax or on on-tax reasons. Non-tax reasons may include access to limited liability or the possibility that certain companies will only do business with a corporation. This is very common if you intend to access the U.S. marketplace.
As a sole proprietor, your income is reported on your personal tax return, taxed on the basis of graduated tax rates.
For corporations resident in Ontario, the first $500,000 of active business income is taxed at about 15.5% and excess is taxed at about 26.5%. If you retain the profits in the corporation, there is a tax deferral of about 30.91% if active business income is under $500K and you are personally at the top marginal tax rate.
If the corporation annually pays out most of its corporate after-tax profits as salaries/dividends, there is no real tax benefit of incorporating because there is no tax deferral. However income splitting among family members may be more tax-effective with incorporating.
To incorporate you need to determine a name for your corporation and who will be the shareholders. Will they be entitled to voting rights? Will they participate in the growth of the company or just be entitled to discretionary dividends? In order to avoid adverse income tax implications, the issuance of shares has to be properly implemented.
Transferring business assets and goodwill to the corporation will trigger tax on any unrealized appreciation. In order to avoid adverse tax implications, it is suggested to have your lawyer prepare a purchase and sale agreement and you should timely file prescribed CRA election forms that will exempt the asset transfer from HST and from personal tax on any potential unrealized appreciation.
You should consult with your professional advisor on all related matters