Real estate investors, you might wonder whether it’s worth transitioning from sole proprietorship to incorporation. Do you spend the money to incorporate your business and bear the expense of hiring an accountant to file your corporate income tax return every year? Or do you save these fees and continue operating as a sole proprietor?
First, consider that the following apply to any business other than a Specified Investment Business or a Personal Services Business:
- The Small Business Deduction makes the tax rate on the first $500,000 of active business income 15.5%
- Lifetime capital gains exemption of $800,000
- Up to $50,000 can be paid in dividends tax-free
To start comparing, look at the tax breakdown for sole proprietorship vs. incorporation:
[su_table]
| Sole-Proprietorship | Incorporated |
| Gross annual income: $120,000 | Revenue: $120,000 |
| Total deductions: $34,460 | Incorporation fees: $1,200 (one time) |
| Net of taxes: $85,540 | Accounting fees: $1,200 |
| Savings: $10,000 | Corporate taxes (15.5%): $18,228 |
| Life insurance: $1,200* | Corporate income: $99,372 |
| Net disposable income: $74,342 | Net of taxes: $87,272 |
| Company retains $13,000 |
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* More on life insurance below
Also, incorporated can take advantage of income splitting:
- Shareholders can be your spouse, any children over 18, elderly parents, etc.
- Dividends up to $50,000 are tax free
- Maximize savings through investments, savings, further dividends, or estate planning
But remember…
- Funds invested through a corporation are taxed at the highest rate
- Funds withdrawn from the corporation are taxed as dividend income
- Funds retained can put the corporation offside of the Small Business Deduction
- There is a capital gains tax upon the death of a shareholder
Getting back to life insurance—why is it so important? A universal or whole life insurance policy…
- Shelters the growth of assets from tax
- Allows you to remove funds from a holding company
- Reduces capital gains exposure at death
So, it’s in your interest to fund a life insurance policy as soon as possible with the extra savings available by incorporating.
Here are some key points to help you weigh your options:
[su_table]
| Sole-Proprietor | Incorporated |
| Better access to funding Save money on accounting feesInsurance for liability protection Potential losses against your personal income | Lower taxes via income splitting Limited liabilityCarry forward losses Having to hire a creative mortgage professional |
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So long as you understand what will work best for you, and you develop a solid plan, you’ll be on the right track.
Questions? The CPAs at RealFile.ca and your Professional Mortgage Advisor at SafeBridgeFinancial.com will be happy to help!
+1 (855) 466-5858