Grande Prairie is known for its entrepreneurial spirit. If you’re interested in launching a new idea, or you’ve grown your reputation as a solopreneur, your next step to contemplate could be incorporation. 

To determine if incorporation is the right choice for your business, there are several factors to consider. The team here at McNabb Lucuk LLP recommends seeking personalized, professional advice before incorporation and is available to serve all your business accounting and bookkeeping needs. 

Benefits of Incorporation

Limiting Liability

The most common reason for incorporation is to limit personal liability and transfer that risk to the business. This added layer of liability protection makes it more difficult for creditors or customers to go after personal assets if the business defaults on its debts or is at fault for damages. 

Tax Savings 

As a sole proprietorship, individuals must claim all income made by the business as personal income. This results in a personal marginal tax rate of up to 48% in Alberta for income earned by the proprietor. 

Corporate tax rates in Canada are much lower and are only paid on net income after deductions. As of 2024, the Corporate tax rate on income eligible for small-business deduction (SBD), or general income up to $500,000, is only 11% in Alberta. 

When a corporation has a surplus after expenses are paid and shareholders are paid, the lower corporate tax rate allows owners to keep more money within the business to grow operations. Surplus income can also be leveraged through investments, which can help defer taxes while earning a rate of return. 

Sale of the Business

The Lifetime Capital Gain Exemption (LCGE) is available to Canadian-Controlled Private Corporations who grow their business to sell. This exemption allows shareholders to earn just over 1 million dollars on the sale of the corporation completely tax-free. 

We strongly recommend speaking with an accountant before selling as there are a few specific requirements that must be met before the LCGE can be claimed.

Income Splitting

Suppose a lower-income earning spouse is an active contributor in a corporation, working 20 hours or more per week. In that case, married shareholders may benefit from paying less tax on a dividend or salary given to such a spouse. 

Considerations for Incorporation

Accounts

Corporations should have different bank accounts and bookkeeping records from their owners. Keeping financial records separate is important for accurate financial reporting but can mean higher costs in banking and professional fees.

Separate Taxes & Reporting

Corporations are required to file reports to the Canada Revenue Agency. The collection and payment of GST, annual tax filings, and Payroll source deductions if the owner is taking a salary result in additional costs and time spent on the administration of incorporation. Luckily, there are automatic programs and bookkeeping services that make recording, reporting and payments to the CRA easier. 

Owners of the corporation are also required to report any salary or dividends received from the business on personal income tax. Personal tax planning is recommended when choosing how income is paid to shareholders and should be discussed with a qualified accountant during the incorporation process. 

Incorporating your business in Grande Prairie, or elsewhere in Canada, can provide benefits such as limited liability protection and potential tax advantages. However, it also comes with its own set of drawbacks, including higher administrative costs and additional regulatory requirements compared to other business structures. Before making a decision, it’s crucial to carefully weigh the pros and cons based on your specific business needs and goals. Consulting with legal and financial professionals, such as the team here at McNabb Lucuk LLP, can provide valuable insights to help you make an informed choice.