Certain tax and legal principles for corporations
illustrate the advantages and responsibilities of operating a full-blown
corporation. Companies are legal entities with limited liability;
Private corporations which are majority Canadian-owned and "active"
- - C.C.P.C.s - - get tax reductions and owners may exempt
up to $500,000 of gain on the sale of common shares; There is more
flexibility for income-splitting and deducting expenses with a corporation;
and,· Shareholders are generally paid on only a salary or
dividend basis but taxes may be minimized.
Corporations are separate legal entities with "limited
liability". Creditors are restricted to seizing corporate assets
although major creditors will frequently require that officers/directors
provide personal guarantees on corporate debt. Otherwise, shareholders,
officers or directors are not personally liable for corporate debts
unless they engage in criminal conduct or are grossly negligent.
Directors may be held liable for unremitted payroll deductions,
GST and PST as these monies are considered to
be trust amounts held for the government. If a director has no knowledge
of non-remittances and is not involved in day-to-day activities,
a 'non-active director' defense may be raised. Insurance protection
should be provided for directors and to protect the value of a successful
Active Canadian-Controlled Private Corporations
(CCPCs) - - at least 50% of the voting shares held by Canadians
- - will enjoy lower tax rates, and provide up to $500,000 tax-free
per taxpayer on the sale of common shares held for 2 years. Corporations
are treated as active when they deal with the public no matter how
few employees there are. A corporation only owning rental-income
properties, to be treated as active, must employ at least five full-time
employees throughout the year (ITA s.s. 125(7) (e)).
The goal is to minimize taxes getting money out
of a corporation. A dividend/salary threshold determines the optimum
balance between the two types of income for individuals and within
families. It tracks RRSP contributions, CPP contributions
and other income.
Taxable benefits result if you get a company car
or receive interest-free loans to purchase a home or shares in the
corporation. These arrangements are advantageous.
Corporate bonuses may be deducted immediately by
the corporation and paid to the recipient within 6 months. This
reduces corporate tax and defers personal taxes.
To split income, spouses and children may be paid
wages as employees and/or directors. They must be paid on a FMV
basis. They may also receive dividends if they own shares. Dividends
from any Canadian corporation are taxed preferentially since the
Dividend Tax Credit partially offsets corporate taxes paid.
A spouse receiving only Canadian dividends, would pay no personal
taxes on about the first $25,000. Therefore, the only tax is the
corporate tax paid on profits - - 18.6% in year 2007.
For active CCPCs, the Small Business
Deduction (SBD) in year 2007 reduces combined basic Federal/Ontario
taxes from the full rate of 49.8% to 18.6% (13.1% Federal plus 5.5%
Ontario) on the first $400,000 of taxable income.
Under the "Rule of Association",
the SBD must be apportioned among "associated corporations"
where there is common ownership. The test is "control"
and Revenue Canada will decide the degree of ownership
that gives de facto control. Check share ownership of investors.
Spouses owning different corporations will be treated as associated.
Common shares of active CCPCs qualify,
on sale, for a capital gains exemption of up to $500,000 per taxpayer
under the Lifetime Capital Gains Exemption. Make shares
more `saleable' by: adding employees to increase revenues and to
provide continuity; selling shares tax-free to employees to give
them equity; and, using corporate after-tax dollars to build up
'hard' assets. You can buy your primary place of business which
gives you the added advantage of reducing overhead.
Corporations must file Federal (T2) and
Ontario (CT23) tax returns within six months of the year-end
and are required to use the accrual basis for accounting purposes.
Business Numbers (BN) replaced GST
numbers in 1996 and are used for GST and payroll remittances
and for personal and corporate taxes. If annual revenues are under
$30,000, you must still complete the BN application to
exempt yourself from charging and remitting GST.
You must use the accrual method that reports income
if invoiced in the fiscal period - - use closing dates - - and deducts
expenses incurred in the period.
GST & Recordkeeping
When you apply for a Business Number,
declaring annual GROSS revenues under $500,000 will result
in your being assigned an annual filing period based on the calendar
year. Quarterly filers must finish the year then elect onto an annual
filing for the beginning of the next year. Note: If you are an annual
filer and your total remittance to GST was greater than
$1,500 in the previous year, you must submit quarterly GST
installments equal to 1/4 of the total GST remitted in
the prior year. GST is simply an extra 6% pool of cash
you receive and must account for.
1. Detailed GST Method. Those
with revenues of more than $500,000 must use this method. It requires
a lot of work with every revenue and expense item entered with the
amount and GST and PST components separated.
2. Quick GST Method. To use this
method, your revenues plus GST are bundled together and
must not exceed $200,000. For the quick method, remit 3.3% of the
first $30,000 of revenues plus GST, and 4.3% on the amount
over $30,000. So, $990 on the first $30,000, then 4.3% of the excess.
Reduce the amount payable or increase a GST refund by claiming
the GST paid for capital purchases. You can elect to use
the Quick Method by filing the proper election form within
the first 90 days of a fiscal year but you must use the method for
at least one full year. The Quick Method benefits corporations
where GST-subject expenditures are less than about 29%
of revenues excluding GST, and benefits mainly corporations
with revenues in the range of $100,000 to $200,000. You must factor
out GST from revenues and expenses even if using the Quick