What is a Corporation?

A corporation is a separate legal entity, which is formed by application to either the federal government, or one of the provincial/territorial governments.  The corporation issues shares to the owners, or shareholders.  The funding of the corporation can be done through the issue of shares, or by borrowing.  Instead of investing a large amount in shares, shareholders can lend money to the corporation, and invest only a minimal amount in the shares.  This way, when the corporation has available cash, the shareholder loans can be repaid without attracting personal income tax.

 

Being a separate legal entity, a corporation pays corporate income tax, which is calculated completely separately from the owners' personal income tax.  If the corporation pays wages to the shareholders, income tax and Canada Pension Plan contributions, and sometimes Employment Insurance premiums, must be deducted and remitted to Canada Revenue Agency.

 

Advantages:

 

Limited liability, meaning the liability of the shareholders is usually limited to the amount that they have invested in their shares of the corporation.  The personal assets f the shareholders are protected form lawsuits against the corporation.  However, shareholders who are directors can be held legally liable for some of the debts of the corporation dependent upon the circumstances.

 

Another major advantage for a profitable small business is the income tax advantage. 

 

There is a $750,000 capital gains deduction on the sale of the shares of a qualifying small business corporation.

 

Private Health Service Plans can be used to provide tax-free benefits to employees. 

 

Disadvantages:

 

A lot more administrative work is involved in handing the paperwork of a corporation.

 

There is a larger cost for the set-up of the incorporation.

 

It is the most complicated business structure.  You need to set up the class of shares correctly.  Decisions need to be made as to whether or not you involve your children and how much control in the company they have.