Who wants to pay less tax?
The best reason to incorporate your business is to save taxes. In Alberta right now, the highest personal marginal tax rate is 48% while the small business corporate tax rate is 13.5% and is set to be reduced to 12.5% in 2017. So, this means you can earn up to $500,000 of profits per year in your corporation and have a tax bill $120,000 smaller than if you earned that same amount as a sole proprietor.
The trick is the profits have to remain in the corporation. If you draw the money out to pay your mortgage, go on a vacation, or buy a new truck, you will have to take those funds into your personal income as dividends or wages and the tax sheltering advantage is lost.
Think of your corporation as a retirement account. Instead of putting money into your RRSP (which will be fully taxable when you withdraw it in retirement), keep the money in your corporation and then you can take out dividends in retirement nearly tax-free.
As your company becomes more profitable, you can transfer the excess cash into a holding company and then invest it in income-producing products like stocks, mutual funds, bonds, and insurance. Since the corporation is paying tax on this income as it is earned, the dividends that are ultimately paid to the owners (especially in retirement when your income is lower) have essentially no tax consequences because of the dividend tax credit.
It’s a simple formula:
