What are some expenses I may have missed on my tax return?
Whether you filed yourself or had someone do it, this is worth reflecting on! Did you claim every tax-reducing expense you were entitled to? One such example would be business use of your personal cellphone.
How are you taxed as a sole proprietor?
Sole proprietors can pay a lot of tax! Personal tax rates can be quite high and can reduce the ability for a sole proprietor to save cash in their business. That said, incorporating is not always the answer. There are tax benefits to be sure, but there’s much more to consider than just that.
What is a corporation?
Today we kick off a series of videos that will answer a big question – should you incorporate your business? Whether just starting, or an experienced entrepreneur, it’s a big question with a lot to consider. But first, we discuss what exactly a corporation is.
Incorporation Advantage – Taxes
One of the most well-known advantages of incorporating is the tax benefits. But what are they exactly? In this video we explore that question in depth and see exactly why corporations have this advantage. If you watch to the end, we also address the perceived unfairness that this may generate – realize that corporations do NOT permanently reduce your taxes. They simply allow business owners to defer larger tax bills until they take the money out of the corporation and use it personally. CORRECTION: In the video we state that the corporate tax rate is 10% federally, when it is in fact 9% federally, which took effect on January 1, 2019.
Incorporation Advantage: Legal
Today we are going to discuss another advantage of incorporating: legal protection. It’s important to remember that a corporation and its owner(s) are different, and they are treated differently for legal matters as well.
As an aside, did you know that professionals don’t get this benefit? All professionals take on a unique responsibility in that they do not get the legal protection of the separation of individual and corporation. So if you sued your lawyer, his professional corporation doesn’t protect his personal assets from the lawsuit.
Incorporation Advantage: Personal Benefits
There are some other advantages to incorporating a business, which are some small personal benefits that you can take advantage of. While many business owners inflate the value of the “business write-off”, there are actually a couple of real benefits.
About the “business write-off” – be careful! You don’t want to throw away $5.00 just to save $1.00 in taxes. And remember that the tax benefit of paying for a business meal is half of the benefit of paying for anything else.
Incorporation Disadvantage: Trapped Losses
Incorporating your business isn’t always the right thing to do. Sometimes it can cause issues, and in certain cases this can result in paying more taxes! One such case is when the business loses money for an extended period of time. In a corporation, the losses are “trapped,” and can only be used by that corporation. As a sole proprietor, you can use those losses in the future against different kinds of income!
This is what makes incorporating (and other business decisions) so tricky – there are often good and bad in every decision.
Incorporation Advantage: Holding Companies
Have you ever heard of a holding company? You may have heard of offshore companies or shell companies, usually talked about as an example of corporate corruption and greed. A holding company though is a legitimate tool that a business owner can use to help further stretch the other advantages of using a corporation
For example, you can move money from one business to a holding company without paying taxes! Once you take it personally though you need to pay the taxes though – remember the taxes are always paid, but a corporation allows you to pay those taxes later down the road.
Some large businesses can have complicated structures using many holding companies.
Incorporation Disadvantage: Professional Fees
Today we look at a disadvantage of incorporating – higher professional fees. Corporations need to do more than an individual, which results in higher costs. Things such as annual returns and a corporate tax return are unique requirements of corporations, and each comes with an attached price.
This is why incorporating is not always the answer – the increased costs could potentially wipe out any benefit gained from reduced taxes!
How can you incorporate an existing business?
Do you currently work as a sole proprietor, but want to incorporate? If you’ve done your research and are ready to proceed, here is some ideas on how to do so.
At this point, even with advanced software, we strongly recommend getting specialized help. Regular CPA’s are not skilled enough to properly complete the rollover – Jaden (our accountant) has seen many, many issues. If you need a referral to an actual tax specialist, let us know and we will direct you to a proven professional.
Think of it this way – you wouldn’t trust your family doctor to perform heart surgery on you. You’d get a heart specialist. There is a similar gap in knowledge and skill between an public accountant and a tax specialist.
Incorporation Rules of Thumb: Existing Business
We’ve shared a lot of information on the pros and cons of incorporating, and here we are going to sum it up. We discuss some of the rules of thumb to consider before proceeding to incorporate an existing business.
But, as with rules of thumb, this doesn’t cover everything and isn’t a hard answer one way or the other. Use these as guidelines in your research so the advice you get it more specific to your situation
Incorporation Rules of Thumb: New Business
If you’re just getting started with a new venture, deciding whether or not to have a corporation is an important early step. It can result in more upfront costs, but it can also result in more long-term savings.
Here, we discuss a few general considerations to help guide you in that decision. Realize though that incorporating is not always the answer! It’s also important to be aware of who is providing you with information, as people naturally begin to develop biases that do not take into account your own situation.
This also wraps up our series on corporations!
CRA Explained: Interest vs Penalties
What issues have you faced in dealing with the CRA?
Our tax system is incredibly complicated and difficult to understand. Our government’s taxation arm, the Canada Revenue Agency (CRA) further complicates this by being vague, confusing, and belligerent. So, we’re hoping over time to help you cut through the fog and understand what’s going on.
How do I know if my accountant is any good?
Switching accountants is often seen as something difficult or challenging to do, so it’s not easy to test a bunch and choose the best. However, some business owners get stuck with a bad accountant for years because they don’t know the difference. Today, we talk about two easy tests to know if yours is any good. If your accountant fails these tests, switching to a new one is not as difficult as you may think! A good accountant will take care of much of the work involved in moving over.