If you have incorporated your business, your company has to pay tax on corporation tax rate. Corporation taxes are taxes against profits earned by businesses during a given taxable period; they are generally applied to companies’ operating earnings, after expenses such as COGS, SG&A and depreciation have been deducted from revenues.
If your corporation is qualified as a Canadian Controlled Private Corporation (CCPC), the active income in your corporation will be eligible for the Small Business Deduction (SBD), which will bring your corporation tax rate as low as 15.5% in Ontario in 2013.
However, the government wants to discourage people from using corporations to defer tax on investment income. The investment income such as interest, dividends, rental income and royalty fee in a CCPC is subject to a high corporation tax rate of 46.17% in Ontario in 2013.
| Active Income Eligible for SBD | General Income not Eligible for SBD | Investment Income Earned by CCCPCs | |
|---|---|---|---|
| Ontario | 15.5% | 26.5% | 46.17% |
| Quebec | 19% | 26.9% | 46.57% |
The advantages of incorporating a small business include:
- Limited liability.
- Lower corporate tax rate of 15.5%.
- Tax flexibility: You can choose the most tax-efficient way to pay yourself, including dividends, salary, bonus or a combination.
The disadvantages:
- Start-up costs
- Complex business structure
- If you are losing money in your business, you can’t deduct your business losses from your personal income.
