Incorporation – Is it for you?

corporate records

In some of my previous blogs, I have propounded the benefits of incorporation and at the same time, the necessity for the proper maintenance of a corporation.

This time, I’d like to address the question: “Why to incorporate?”

Well, first, there are some significant personal benefits from incorporation even if the costs associated with a separate entity in terms of annual filings and tax returns may be considered to be expensive. However, the costs of incorporation and the maintenance of the corporation should be viewed much like a premium on an insurance policy against personal liability.

So let’s look at some of the issues prompting the recommendation for incorporation.

1. Limited Liability – a shareholder of a corporation is not responsible for the debts of a corporation or any litigation of the corporation.

2. For a family business, a corporation permits income splitting such that the profits of the corporation can be divided among various members of a family each of whom has a statutory minimum tax-free amount of income. Distributing money among members of the family with their tax-free exemptions allows for the family, as a whole, to receive some of the profits effectively tax-free.

The marginal tax rate for corporations is approximately 16% on the first $200,000 of taxable income. As opposed to that, at $200,000 per annum personal income, the marginal tax rate is approximately 46%. Obviously, the difference is significant.

3. If you incorporate, you can determine when and how you wish to receive any income. It might be by management fees or it could be by salaries or it could be by dividends. Each of these offers significant income tax differences.

4. A corporation has an infinite life cycle. The death of an entrepreneur has no impact upon the corporation and there are rules relating to crystallized capital gains upon the death of a human which do not apply to a corporation.

5. Corporations are understood much better in the financial market and in banks than private entrepreneurs or individuals and that includes even partnerships. Banks generally prefer to deal with corporations as they understand that structure very well.

6. There is also a possibility that being incorporated is a positive reflection on the seriousness of the entrepreneur. To have actually embarked upon incorporation costs money and time and somewhat legitimizes the intentions of the business person who has actually committed time and money to create his entity.

7. Lastly, a corporate entity is capable of addressing the multitude of interests various participants in the business may have by way of shares whether with voting rights or without voting rights and whether by way of dividends or other methods of repatriation of capital.

Overall, a corporate entity is infinitely superior to a proprietorship and, in terms of elimination of liability, the only vehicle available to protect the personal assets of a business person both from any creditors and as well from litigation liability.

We’d be pleased to address these issues with you and look forward to your inquiries.

Some Considerations to Avoid Unnecessary Taxes

the-taxman-cometh-in-2011-for-entrepreneurs

We are always concerned about reducing our tax obligations and any steps that can be taken to do so obviously should be considered.

There was a recent article in the Globe and Mail back on February 14 captioned “Dodge that Blow: 6 Legal Ways to Avoid the Taxman’s Hit”. With full credit to Tim Cestnick, I think it is worth recording some of his suggestions.

In brief here are his comments:

1. Negotiate non-taxable benefits with your employer such as membership fees, interest subsidies or discounts on purchases done through the company. Possibly only a taxable benefit and not the full taxable load would be payable.

2. There is a possibility of tax-free death benefits from a corporation up to $10,000. That would at least cover the cost of a funeral and is not taxable.

3. Exempt life insurance policies should be seriously considered with designated beneficiaries. Note that you can’t claim the deduction for the insurance costs, but the pay-out is tax-free.

4. Second properties and investment vehicles. You can change the principal residence exemption, but you are only allowed to have one property as your principal residence. You should be addressing which property has the greatest growth potential and that should be your principal residential property for exemption purposes.

5. Something near to my heart is using secondary wills and even tertiary wills and even quadrary wills depending upon the assets to be covered and in respect to which probate fees would be avoided.

6. Lastly, there is a possibility of repatriation of capital provided to your corporation which repatriation is tax-free. You have to be ready for orchestrating your company structure with loans to the corporation rather than investment in shares in order to take advantage of the tax-free repatriation of shareholder loans.

These are just 6 ways to improve your tax position and each one of these should be seriously considered as yet further support for being incorporated.

We’d be pleased to discuss any or all of these considerations with you at your convenience.

Minute Books

corporate records

I’m going to try this message again. For whatever reason the importance of the maintenance of the minute books for corporations just does not seem to get to any level of importance among all of the other demands most businesspersons operating as a corporate entity fully appreciates.

Government Requirements

First, it is the law of the Province of Ontario that there must be annual Resolutions of the directors and of the shareholders of each corporation. There is no exemption for the fact that the corporation may only have one shareholder or that it is a family corporation. The rules apply to every corporation. Every corporation must have annual directors’ and shareholders’ Resolutions.

Next, every corporation is required to maintain financial statements. Obviously, the financial statements are the foundation for income tax returns. As we all know, corporation income tax returns must be filed annually.

Further, there are additional minimum annual requirements: you must elect directors annually (there is a potential exemption for directors elected for a maximum of 3 years). You must have an appointment of an auditor or accountant by the shareholders annually. If you wish to exempt the corporation from the requirements of an audit, that must be done annually by the shareholders. Any dividends declared by the corporation within the fiscal year must also be recorded.

Here’s the Tax Issue

The message is simple: the income tax payable by a recipient of a dividend is significantly less than the income tax on other earned income by the same taxpayer. Obviously Canada Revenue Agency wishes confirmation of why it is receiving a lesser amount of tax as the result of a recipient receiving dividends rather than income. If there is not correlation between the corporation’s minutes and what the taxpayer or shareholder records, that inconsistency will give rise to an assessment.

An abundance of corporations are created by merely the filing, whether online or otherwise, of Articles of Incorporation. It seems the expectation is that just this step ends the requirements to carry on business as a corporation in compliance with Ontario regulations.

Quite the contrary, that only begins the obligation to maintain proper books and records within the corporate entity, to prepare appropriate financial statements, to hold annual shareholders’ and directors’ meetings, to pass annual directors’ and shareholders’ Resolutions or minutes of meetings and to properly file income tax returns.

It seems the assumption is that once incorporated, there is nothing further to do. Quite the contrary. Once a corporation is incorporated, it is a separate entity for tax purposes and for business purposes. The benefit of being incorporated includes elimination of personal liability. However, on the other side, in order to continue to enjoy exemption from personal liability, all activities within the corporation must only be conducted within the corporation but also that all activities conducted within the corporation are recorded. Otherwise, personal liability will result.

It is not surprising to wish to avoid the annual legal costs to update the minute book. Indeed, it is probably possible to avoid governmental sanctions for failing to do so for maybe 2 or 3 years.

All of that comes to a crashing halt in the event of an audit by either the Provincial or Federal government authorities. Then there is a mad dash to do what should have been done and often times the labour and time commitment to correct what should have been done exceeds the amount of time and costs had it been done properly in the ordinary course.

We strongly encourage our clients to elevate the importance of their minute books and their corporate records. We well understand that many clients prefer to gamble against the prospect of any governmental inquiry. We are also equipped to handle those last moment “crash” events.

But the departing message must be that once you have engaged in a corporate entity for obvious business and personal liability exemption reasons, the “shield” that you have created also must be sustained and there is a cost to do that. That cost, in our experience, is significantly less than the cost, in terms of actual cash and management time, if you fall behind.

We would be most pleased to speak with you about the maintenance of your corporate records and how we can assist you to avoid that “crash”.

When CRA Comes Calling

the-taxman-cometh-in-2011-for-entrepreneurs

There is probably no more unnerving experience for a businessman than to receive a call from CRA that it intends to conduct an audit. Almost immediately (and, as it actually turns out) the imposition on normal business is immense, the distraction from normal business activities is costly and, at the end of the day, more than likely, there will be an out of pocket experience.

Also, from my experience, which, in this case, is personal experience, when CRA arrives, businessmen are ill-prepared for CRA’s orientation, examination and requirement for documentation.

Focus Mis-connect

Most businesspersons carry on business with a focus on customers/clients, the delivery of products and services and, hopefully, prompt payment. Unfortunately, that is not the focus of CRA. CRA is oriented to proper collection of HST and its remittance, maintenance of records to reflect the input tax credits associated with any invoice and the documentation of expenses and deductions, all of which are at the opposite end of the focus of most businesspersons.

So here are some suggestions on how to handle these issues, remembering that your records must be maintained for a minimum of 6 years for CRA and anyone’s memory of an expense or deduction or an adjustment on an account years earlier will naturally fade, the first prescription is to be sure that you have your bookkeeping and accounting services well informed and well in advance and well documented.

While my office operates on an electronic system for all of our business (digitally stored and appropriately backed up with multiple copies of invoices and payments, monthly bank reconciliations and professional service providers assisting), when CRA came calling upon us, we realized that we needed additional assistance.

I immediately retained Wm. J Trotter & Associates and he assigned one of his Senior Partners, Peter Anderson, to take charge of our matter and encouraged us to engage an extremely competent (and as it has turned out, economical as well) independent bookkeeper, Annette Panopoulos, to reconstruct all of our records, produce them on spreadsheets and interface with CRA.

Where We Are – Advice to the Masses:

While we are still in the midst of fully supplying CRA with all of its requirements, without the assistance of Bill, Peter and Annette, we would have been hopelessly overwhelmed. Our day-to-day operations would have been essentially stopped and our ability to service clients would have been seriously impeded. Further, with their assistance, we have restyled our operations to address any potential future examination and, at the same time, possibly even relieved our office personnel from some of the time consuming responsibilities they had assumed in our ordinary operations.

The assistance from Wm. J Trotter & Associates and the recommendations we have implemented have been immensely appreciated and have been a lesson for us as we deal with our clients. We feel much more confident in our advice and professional services for our clients given our own experience. That is not to suggest that a lawyer needs to be sued himself in order to fully appreciate his clients’ concerns. But it is a lesson.

We will be adding to our services to our clients our experience in the importance of documentation and procedures that could potentially relieve our clients from the devastating consequences of an intensive audit by CRA and the negative impacts upon the operations of our clients’ businesses.

© Copyright Peter R. Welsh Law Professional Corporation - Theme by Pexeto