Drawbacks of incorporating yourself?

[Scotty]

Has anyone else here incorporated for the purpose of saving taxes? I'm looking at doing so for my royalty income as I'm currently looking at close to a 40% income tax bracket as is. If I incorporate I figure I can pay the corporate tax rate, put much of the money into investments for the future, and perhaps pay myself a small salary. I know there'll be paperwork, and additional tax forms to do, but is there anything obvious I should be watchful of that others might have experienced?

Anyone know what legal fees are generally charged to set this sort of thing up?

Edited May 16, 2011 by Scotty

[Michael Hardner]

Has anyone else here incorporated for the purpose of saving taxes? I'm looking at doing so for my royalty income as I'm currently looking at close to a 40% income tax bracket as is. If I incorporate I figure I can pay the corporate tax rate, put much of the money into investments for the future, and perhaps pay myself a small salary. I know there'll be paperwork, and additional tax forms to do, but is there anything obvious I should be watchful of that others might have experienced?

Anyone know what legal fees are generally charged to set this sort of thing up?

Hi Scotty - my understanding that the initial setup costs and regular filings are the only drawbacks. There are many financial advantages: I think a friend of mine used it to pay himself a small salary and to save money so that he could continue to pay himself in any future periods of low earnings.

[Bonam]

Hi Scotty - my understanding that the initial setup costs and regular filings are the only drawbacks. There are many financial advantages: I think a friend of mine used it to pay himself a small salary and to save money so that he could continue to pay himself in any future periods of low earnings.

And the initial costs are very low as well. At least in BC. They actually make it super easy for you to start your own business.

[dre]

Get an accountant to look at your business. Hell be able to tell you if its worth it or not. Also I assume youre running your business as a proprietorship right now... theres a mountain of different instruments that your existing model can leverage to reduce taxes, so make sure youre using all of those. You can probably write off a lot of your home expenses, your vehicle, insurance, even part of your mortgage and a whole slew of other things. You might be able to pay your wife or girlfriend a secretarial salary as well.

[msj]

I'd say the drawback here is that you go the cheap route (costs about $400 in all) and then find out how difficult it is to file a T2 return so you go to an accountant to do it.

Then the accountant looks over your income and realizes that it does not qualify as active income or your company qualifies only as a PSB.

Either way, the incorporation would be a waste of money if one of these applies.

So, stop being so damn cheap, go see an accountant to see if incorporation makes sense for you and pay the modest bill.

[charter.rights]

Get an accountant to look at your business. Hell be able to tell you if its worth it or not. Also I assume youre running your business as a proprietorship right now... theres a mountain of different instruments that your existing model can leverage to reduce taxes, so make sure youre using all of those. You can probably write off a lot of your home expenses, your vehicle, insurance, even part of your mortgage and a whole slew of other things. You might be able to pay your wife or girlfriend a secretarial salary as well.

This is the best advice, since those with free advice are often wrong.

One more of the tax shelters is to contribute to your spouse's RRSP...but talk to an accountant first.

[MiddleClassCentrist]

Has anyone else here incorporated for the purpose of saving taxes? I'm looking at doing so for my royalty income as I'm currently looking at close to a 40% income tax bracket as is. If I incorporate I figure I can pay the corporate tax rate, put much of the money into investments for the future, and perhaps pay myself a small salary. I know there'll be paperwork, and additional tax forms to do, but is there anything obvious I should be watchful of that others might have experienced?

Anyone know what legal fees are generally charged to set this sort of thing up?

Have you considered the double taxation?

- Your corporate profits are taxed.

- Your personal income is taxed.

Benefit -> You an royally eff up with your corporation and not be personally liable for the debt.

Edited May 17, 2011 by MiddleClassCentrist

[Scotty]

I did recently get an accountant. Most of my money is coming from the US and 30% is being withheld for tax purposes until I get my forms set up properly there, then I can get that money back by filing a US tax claim. I've spoken to him about this and he is going to recommend an attorney. I did NOT consider the double taxation, and that does give me some pause. On the other hand, it's hard to believe the kind of money I'm now getting ($25k per month), and have been for the last six months, will continue indefinitely. So if I can incorporate, save a bundle on short term taxes, invest the money, and then, presumably when the flow of royalties goes down, I'd save a lot. I do currently write off a home office on my personal taxes, which includes a % of all my household expenses, but I'd be hard-pressed to honestly write off car payments or a salary to my GF. LOL.

Not that investing money for the future is looking all that wonderful of late. My mutual funds haven't done a lot this year. My ETFs are down, and the stocks I picked (RIM - ack!) are way down. It's looking like paying off my mortgage early is going to be the best investment I can make. Maybe i can make the house the 'corporate headquarters' and write off the whole thing. Actually, is that legal? Could my "corporation" buy a house, then rent it to me?

Edited May 17, 2011 by Scotty

[charter.rights]

I did recently get an accountant. Most of my money is coming from the US and 30% is being withheld for tax purposes until I get my forms set up properly there, then I can get that money back by filing a US tax claim. I've spoken to him about this and he is going to recommend an attorney. I did NOT consider the double taxation, and that does give me some pause. On the other hand, it's hard to believe the kind of money I'm now getting ($25k per month), and have been for the last six months, will continue indefinitely. So if I can incorporate, save a bundle on short term taxes, invest the money, and then, presumably when the flow of royalties goes down, I'd save a lot. I do currently write off a home office on my personal taxes, which includes a % of all my household expenses, but I'd be hard-pressed to honestly write off car payments or a salary to my GF. LOL.

Not that investing money for the future is looking all that wonderful of late. My mutual funds haven't done a lot this year. My ETFs are down, and the stocks I picked (RIM - ack!) are way down. It's looking like paying off my mortgage early is going to be the best investment I can make. Maybe i can make the house the 'corporate headquarters' and write off the whole thing. Actually, is that legal? Could my "corporation" buy a house, then rent it to me?

If I'm not mistaken the maximum you can write off on your house is 25%.

[Scotty]

If I'm not mistaken the maximum you can write off on your house is 25%.

Normally, as a business expense, yes.

However, if my 'corporation' buys the house, and then rents it back to me, that's a way to put money from my royalties into paying for something without doing the 'double dipping' tax thing, of first paying 15% as a corporation, then paying my own personal taxes on the income the corporation pays me. I believe that's probably legal but will want to check.

Edited May 17, 2011 by Scotty

[msj]

Scotty, if even half of what you say is true then get advice from professionals rather than from forum members.

This appears to be nothing more than an exercise for you to brag which, given the anonymousness of this forum, is strange since I am the richest, best looking and the most interesting man in the world. And, when I drink beer, I prefer Dos Equis.

Oh, and as a tax accountant I can tell you I wouldn't want you as a client.

Something tells me "F" client is in the cards.

Edited May 17, 2011 by msj

[Scotty]

Scotty, if even have of what you say is true then get advice from professionals rather than from forum members.

I intend to. I'm basically bouncing ideas around at the moment.

This appears to be nothing more than an exercise for you to brag which

,

Perhaps you find it necessary to seek the approval of anonymous people on the internet, but I'm not that lacking in self-esteem

Then again, perhaps I have more social skills than you and can brag to people in real life, if I so desire.

I don't trust a lot, to be honest. I don't trust financial advisers to be honest. I don't trust lawyers to tell me the downside of things without my thinking about them. I like to get opinions from people who have no vested interest in advising me one way or another, and to point out things I haven't thought of. My accountant didn't mention double dipping, for example, so I was glad someone here did. Nor did he even suggest I incorporate. I thought of that myself. So I'm a little leery about how much thought he's putting into me.

Oh, and as a tax accountant I can tell you I wouldn't want you as a client.

Something tells me "F" client is in the cards.

I'm reminded of Harper's self deprecating joke about going into economics because he didn't have the sparkling personality to be an accountant. You must be a ball of fun at parties.

Edited May 17, 2011 by Scotty

[msj]

I intend to. I'm basically bouncing ideas around at the moment.

A strange place to bounce ideas around. There are other forums (note to moderator, I shall not speak of them!) for which you may find people with relevant experience.

Perhaps you find it necessary to seek the approval of anonymous people on the internet, but I'm not that lacking in self-esteem

If I sought approval of anonymous idiots then I wouldn't have written to you the way that I have done.

Then again, perhaps I have more social skills than you and can brag to people in real life, if I so desire.

Bragging is for the nouveau rich.

What's that saying?

They're not rich enough to buy cheap things.

I don't trust a lot, to be honest. I don't trust financial advisers to be honest. I don't trust lawyers to tell me the downside of things without my thinking about them. I like to get opinions from people who have no vested interest in advising me one way or another, and to point out things I haven't thought of. My accountant didn't mention double dipping, for example, so I was glad someone here did. Nor did he even suggest I incorporate. I thought of that myself. So I'm a little leery about how much thought he's putting into me.

I wouldn't take the word of a person on this forum over the advice of a professional accountant (i.e. CA or CGA) when it comes to taxes.

Hmmm, take the word of someone who doesn't know tax law because they don't have a "vested interest" or find a competent tax professional who would have a "vested interest" of not only advising you based on their experience but because they follow an ethics code and could be sued if they give you poor advice?

Let me think about that one again?

Hmmmm, nope, still better to pay for some advice.

I'm reminded of Harper's self deprecating joke about going into economics because he didn't have the sparkling personality to be an accountant. You must be a ball of fun at parties.

I could be a ball at parties.

Don't know.

I never remember what happens and the staff are too afraid to show me the pictures.

[dre]

Normally, as a business expense, yes.

However, if my 'corporation' buys the house, and then rents it back to me, that's a way to put money from my royalties into paying for something without doing the 'double dipping' tax thing, of first paying 15% as a corporation, then paying my own personal taxes on the income the corporation pays me. I believe that's probably legal but will want to check.

However, if my 'corporation' buys the house, and then rents it back to me, that's a way to put money from my royalties into paying for something without doing the 'double dipping' tax thing, of first paying 15% as a corporation

Thats a pretty bad idea because you already get a mountain of tax breaks by being the owner of your principle residence, and you get a home owners rebate from the government to cover about 1/4 of your land taxes each year. Plus... your home will most likely appreciate over the next decade and as a home owner you can sell your principle residence without paying a dime in capital gains taxes. That alone could save you about 30K... supposing your home increased in value by 100k over the next decade.

[fellowtraveller]

However, if my 'corporation' buys the house, and then rents it back to me,......

a legion of auditors at CRA is already sharpening their knives and drooling. The basis of establishing/operating a business(incorporated or not) is expectation of profit generated by the business activity. Didddling around with your own static investments and pretending you have legitimate writeoffs will guarantee that you will get intimate with their interview rooms. And then the few bucks you saved on an accountant now will be ntohing when its costing $200/hour and the meter will be running.

all the same deductions are available incorporated or not. Your assets are not really protected in an incorporated company unless you have massive assets. if you tke small loans or credit cards as a company, you won't get the credit unless you have specific corporate assets a collateral or provide personal guaranatees. Banks are not that dumb.

Get professional advice.

Mine told me there is very little difference in tax outcomes (incorporated vs unincorporated) unless you have significant income generated by business activity and significant legitimate costs in generating that income. If you can't show both, hello major penalties!

[charter.rights]

Normally, as a business expense, yes.

However, if my 'corporation' buys the house, and then rents it back to me, that's a way to put money from my royalties into paying for something without doing the 'double dipping' tax thing, of first paying 15% as a corporation, then paying my own personal taxes on the income the corporation pays me. I believe that's probably legal but will want to check.

You have to be careful of this tactic because as a company asset, when it is sold you will have to pay capital gains on it and income taxes on top of the municipal property taxes for any rent you pay. Plus in any form of liability situation against the corporation the house becomes a seizable asset, putting you and your family at a greater risk. You will also likely have a problem with municipal zoning in that in most municipalities only allow a portion of the home can be used for home-based businesses. In the end there is no logical reason for having the corporation buy the house and rent if back to you. You can take the risk but I believe it will cost you more in the end.

[Scotty]

a legion of auditors at CRA is already sharpening their knives and drooling. The basis of establishing/operating a business(incorporated or not) is expectation of profit generated by the business activity. Didddling around with your own static investments and pretending you have legitimate writeoffs will guarantee that you will get intimate with their interview rooms. And then the few bucks you saved on an accountant now will be ntohing when its costing $200/hour and the meter will be running.

Well, after further inquiries I've decided against. The big thing was the double dipping. I couldn't think of a way to get the money from the corporation to ME without having to pay taxes on it a second time. If the company bought a car, for example, and let me drive it, it'd be a taxable benefit to me, just as a salary would be, just as the 'corporation' letting me live in its house would be. The only advantage would be to filter the money to me over a period of time so that I would be in a lower tax bracket, but even without the new additional income I'm already in a pretty high bracket from my salary, so when you add in the extra professional fees, the ongoing paperwork, and ongoing problems of accessing the money it doesn't really make sense.

[charter.rights]

Well, after further inquiries I've decided against. The big thing was the double dipping. I couldn't think of a way to get the money from the corporation to ME without having to pay taxes on it a second time. If the company bought a car, for example, and let me drive it, it'd be a taxable benefit to me, just as a salary would be, just as the 'corporation' letting me live in its house would be. The only advantage would be to filter the money to me over a period of time so that I would be in a lower tax bracket, but even without the new additional income I'm already in a pretty high bracket from my salary, so when you add in the extra professional fees, the ongoing paperwork, and ongoing problems of accessing the money it doesn't really make sense.

There is another way. Find an native business partner who can operate the business on reserve. They don't pay taxes.....and since the government has no authority to look at their books, there is no way for them to know if you were paid a dollar or $100,000.

[msj]

There is another way. Find an native business partner who can operate the business on reserve. They don't pay taxes.....and since the government has no authority to look at their books, there is no way for them to know if you were paid a dollar or $100,000.

You do not know of what you speak.

Being on reserve and "operating" on reserve are two different things and it is ignorant statements like the above that find many first nations "business" people staring down $160,000 tax bills (as I have had the experience of dealing with one recently).

Really, people: if you don't know squat then please STFU.

[charter.rights]

You do not know of what you speak.

Being on reserve and "operating" on reserve are two different things and it is ignorant statements like the above that find many first nations "business" people staring down $160,000 tax bills (as I have had the experience of dealing with one recently).

Really, people: if you don't know squat then please STFU.

Having an aboriginal business partner operating on reserve (unincorporated) means that neither the business or the personal partners (native or not) are open to government scrutiny, UNLESS they offer it voluntarily. I work with First Nation people EVERY DAY, and know the law as well as anyone. I even helped one business located on reserve lately get Canada Revenue Agency to withdraw a $10,000 GST account because the work they do is located in primarily in southern Ontario, and southern Ontario is the sovereign territory of Six Nations....meaning that the Charter of Rights and Freedoms vis a vis the Royal Proclamation 1763, over rides the Indian Act, or Tax Laws. CRA zeroed the account and closed it without hardly a whimper.

However, even though CRA acts like a bully lots of times (as they did in the case above) the law is a very much different beast. And FN people have to resist the attempts by CRA to extort money from them

I also sit on the Board of Directors for a Capital Corporation that deals with First Nation lending and business consulting. So perhaps you wouldn't mind STFU.

Edited May 20, 2011 by charter.rights

[msj]

I also sit on the Board of Directors for a Capital Corporation that deals with First Nation lending and business consulting. So perhaps you wouldn't mind STFU.

My apologies charter.

I misread your post and assumed you meant incorporated entities which is not the same as partnerships.

Yes, FN's are going the partner and Limited Partnership/Trust route for now.

I would still caution, however, that if much of the business activity is not on reserve, then there will be a judgement day (in the courts, not some kind of rapture like the one that's supposed to happen tomorrow) on this that may see some businesses/people surprised.

[charter.rights]

My apologies charter.

I misread your post and assumed you meant incorporated entities which is not the same as partnerships.

Yes, FN's are going the partner and Limited Partnership/Trust route for now.

I would still caution, however, that if much of the business activity is not on reserve, then there will be a judgement day (in the courts, not some kind of rapture like the one that's supposed to happen tomorrow) on this that may see some businesses/people surprised.

The friend of mine who was being chased by CRA, challenged them on, off-reserve business. Since Six Nations has never surrendered land to the Crown, and Southern Ontario was recognized prior to the Royal Proclamation 1763, the following applied:

"And we do. by the Advice of our Privy Council, declare and enjoin, that the Trade with the said Indians shall be free and open to all our Subjects whatever."

As well, my friend made note that 1. GST was a "consumer tax" payable by the purchaser and taxes could not by Band Council Resolution be charged or paid by anyone on reserve, and,

2. Section 89 of the Indian Act:

"Subject to this Act, the real and personal property of an Indian or a band situated on a reserve is not subject to charge, pledge, mortgage, attachment, levy, seizure, distress or execution in favour or at the instance of any person other than an Indian or a band."

And trying make him responsible for the consumers tax was an attempt at an illegal seizure....

When this was presented to CRA they did not challenge him and wiped his $10,000 GST clean and closed his account. Cool how the big bully folds when he is confronted with the law....

[charter.rights]

My apologies charter.

I would still caution, however, that if much of the business activity is not on reserve....

I forgot to mention that recently there have been a number of Tax Court rulings in favour of FN to fish off reserve and sell their catches commercially, tax free. So the era of CRA making up the rules as they go is over for FN, and I think this will eventually apply to other activities. As an example, Six Nations people have a long history of acting as merchants and agents for other First Nations in the selling or trading of furs and other commodities. This might translate in a modern sense to entrepreneurial enterprises between FN and settlers that existed long ago. Thus the Proclamation 1763 that protected free and open trade with the natives would included no taxation.

[msj]

I forgot to mention that recently there have been a number of Tax Court rulings in favour of FN to fish off reserve and sell their catches commercially, tax free. So the era of CRA making up the rules as they go is over for FN, and I think this will eventually apply to other activities. As an example, Six Nations people have a long history of acting as merchants and agents for other First Nations in the selling or trading of furs and other commodities. This might translate in a modern sense to entrepreneurial enterprises between FN and settlers that existed long ago. Thus the Proclamation 1763 that protected free and open trade with the natives would included no taxation.

I hope you're right on this. But we'll see in a few more years, I'm sure.

[joeblack]

I know this is bumping an old thread, but just in case people are using this as a reference:

Clearly you didn't inquire too deeply Scotty, as there is no issue with "double dipping" as it is being called here.

There are two common ways of getting money out of a corporation: management fees or dividends, or a combination of both, depending on the client's circumstances. For example, say your corporation grosses $100,000 and has $50,000 in expenses. You then have $50,000 in profit. You can deal with this in two ways:

1. Record a business expense called a management fee (or bonus, whatever) of $50,000. This in turn causes your corporation to make zero income, and of course you don't pay any corporate taxes when you don't make any money. You in turn take that $50,000 into personal income, where you pay tax on it at an approx 30% rate, resulting in a final tax expense of $15,000.

2. The second way to receive the money is via a dividend from the corporation to your person. The company instead records net income of $50,000 and pays tax at a 14% rate (AB small business rate), resulting in a tax expense of $7,000. Remembering that dividends are paid out of after-tax money, the company then records a $50,000 dividend due to your person. Because the Canadian government recognized that the $50,000 dividend has already had tax paid on it, long story short you make up the difference between the tax already paid and what your personal rate is. Generally speaking, dividends of less than $40,000 will result in zero personal tax, so in this case lets say the $50,000 results in a net personal tax due of $1,000, resulting in a total tax expense of $8,000.

Any CA worth his salt would be able to have told you this, so I don't know how deep you dug. Suffice it to say there is no such thing as "double dipping".

Anyway, like I said, just in case people are using this as a reference I figured this needed to be cleared up. I have a lot of clients who use both methods to get money out of their corp, and with decent tax planning essentially use their corporations as a better version of an RRSP. I could get into this more if there is interest, but will cut it short for now.

As for the actual drawbacks of incorporating, it mainly comes down to extra paperwork and higher accounting fees. Other than that, there is no harm whatsoever, and people mainly choose to incorporate for the tax advantages and for the limited liability. Cheers.

Well, after further inquiries I've decided against. The big thing was the double dipping. I couldn't think of a way to get the money from the corporation to ME without having to pay taxes on it a second time. If the company bought a car, for example, and let me drive it, it'd be a taxable benefit to me, just as a salary would be, just as the 'corporation' letting me live in its house would be. The only advantage would be to filter the money to me over a period of time so that I would be in a lower tax bracket, but even without the new additional income I'm already in a pretty high bracket from my salary, so when you add in the extra professional fees, the ongoing paperwork, and ongoing problems of accessing the money it doesn't really make sense.