- By Paul Adeyeye
If you are planning to purchase a property in your business name as incorporation in Canada. Especially, if your business is incorporated, you will enjoy this article.
First, corporations enjoy lower taxes. For example, in Ontario, If your business earns less than 500k net your expenses in a year, you will pay 12% in taxes. However, if you report the same value as personal income, it will trigger about 53% of taxes.
If you have some money in your business account, and you don’t want to move it to your personal account to avoid personal income tax. You may want to buy a primary residence with the money.
One way to do this is to buy a primary residence in the name of your company. Your company pays all the mortgage fees and related expenses. However, you will need to pay a fair market value rent to your company.
Any rental loss experienced during this arrangement can be claimed as corporate tax returns. However, if you choose to sell this property, you will not enjoy the primary residence sale tax exemption as this property will attract capital gains for your company.
If you have a primary residence already, and you are thinking of moving to a bigger house, you can sell your current house to your company, this helps you get all the proceeds without paying capital gain taxes, and you can use the proceeds to buy the new house.
Your company can rent the former house and earn rental income. When you choose to sell your new house in the future, you will still enjoy capital gain tax exemption as long as it’s your primary residence.
This last option may have a negative impact on lifetime capital gains exemption if you choose to sell your company because you have another asset in the name of the corporation.
Whichever option you choose, please talk to your tax advisor for proper guidance.
Lifetime capital gains exemption, Advantages of Sole Proprietorship, Partnership, and Incorporation
Some of the advantages available to incorporated businesses are:
- Lifetime Capital gains exemption LCGE
- Lower tax rates
- Income splitting
- Limited liability
- Income tax deferral
Lifetime capital gains exemption LCGE is a huge benefit if you need to sell your business anytime. When you sell a business, your profit is called capital gains. Capital gains attract 50% taxes of the profit. However, if you are selling an incorporated business, you enjoy LCGE.
The LCGE for 2022 is $913,630. Let’s check out an example: If you sell your startup, and make a profit of $970,000, you would need to pay taxes on $485,000, i.e 50% of the profit. With LCGE, you will only pay taxes on 50% of (970,000 – 931,630) which is $19,185. Did you say wow?
Interestingly, The LCGE is not a one-time exemption. It has a cumulative lifetime limit, so you can continue to use the exemption until you max out the limit. Farmers even enjoy higher LCGE.
Lower tax rates are another great benefit. For example, if you make above 250k per annum as personal income your federal tax rate is about 33%, and provincial taxes are not inclusive. For Incorporation, federal taxes are between 9 to 15% for the first 500k earnings.
Income Splitting: You can pay dividends to your spouse and children if your business is incorporated. These dividends will also help to lower your tax bracket. You must include your spouse and children as shareholders when incorporating for them to be eligible for dividends.
Limited liability: Entrepreneurship is a game of faith. If something goes wrong such as debts or bankruptcy, your personal assets are protected against creditors. Your family is protected from any financial stress that the company might be exposed to. The business is an entity.
Income Tax Deferral: An incorporation can keep her earnings in the corporation instead of withdrawing for personal use if not needed. Profit can be reinvested back into the business, or other investments. This helps to defer personal taxes on withdrawals.
Paul Adeyeye is an author, business consultant and an advocate of business ownership in Canada because of the numerous advantages it offers. Twitter/@DeyeyePaul