Liability protection: A corporation protects your personal assets from business creditors.
Tax deferral: If you do not spend all you earn, you can potentially defer up to 35% of tax by saving and investing the excess cash inside the corporation.
For example, assume you make $150K per year but only need $100K for personal expenses. If you are not incorporated, you would pay $25K tax on the excess $50K and have $25K remaining to invest. Inside a corporation, the tax on the extra $50K would be only $7.5K, leaving $42.5K to invest.
Tax reduction: Personal tax rates vary from 0% to 50% depending on your level of income for that year. As personal tax is only paid when funds are withdraw from a corporation, you can average out your personal income to taking advantage of the lower tax rates.
Income splitting: Corporate profits can be split with a spouse once you are 65, which may allow income to be drawn from the corporation at a lower tax rate.
Selling the business: The sale of shares of a private corporation may be eligible for a tax exemption if certain conditions are met.
Estate planning: There may be an opportunity to reduce taxes on death with a corporation.
Your customer requires you to incorporate: This is to clearly establish that you are not an employee.
There are no immediate tax advantages to incorporating if:
- You plan to take the money out of the company to pay down debt.
- You have significant RRSP contribution room and you plan to save within your RRSP.