💼 Thinking About Incorporating in BC? Here’s How It Can Save You Money!
If you’re running a small business in BC and thinking about taking things to the next level, you might wonder if it’s time to incorporate. Spoiler alert: Incorporating can unlock some substantial tax benefits, but let’s break it down and see how it can help you save money and grow your business.
💡 Lower Corporate Tax Rates: Keep More of What You Earn
One of the biggest perks of incorporating your business is access to lower corporate tax rates. In BC, incorporated enterprises benefit from the small business tax rate of 2%, which is lower than personal income tax rates. So, instead of paying higher personal taxes on your business income, you can pay less by keeping earnings within your corporation.
How It Works:
- For the first $500,000 of active business income, you’ll pay the small business tax rate (combined federal and provincial is currently 11% in BC ).
- Any earnings above that threshold are taxed at the general corporate rate, which is 27% in total (15% federal, 12% provincial).
🏦 Income Splitting: Share the Wealth (and the Tax Savings)
Got family members involved in your business? Incorporating opens the door to income splitting, sometimes referred to as “income sprinkling, ” which can help distribute income to family members in lower tax brackets. Paying a spouse or adult children a salary or dividends can shift income into lower tax brackets, potentially reducing your overall tax burden. This approach must comply with the Tax on Split Income (TOSI) rules to avoid penalties.
💰 Deferring Taxes: Save Now, Pay Later
Incorporation also allows for tax deferral strategies. If your business is profitable but you don’t need to withdraw all the earnings immediately, you can leave some profits in the corporation, where they are taxed at the lower corporate rate. This means you can delay personal income tax until you take those funds out in the future, when your individual tax rate may be lower.
🔑 Lifetime Capital Gains Exemption (LCGE): A Big Bonus for Selling Your Business
One of the significant perks of incorporating in BC (and across Canada) is the Lifetime Capital Gains Exemption (LCGE). This exemption allows you to sell shares in your qualifying small business and claim up to $1.25 million in tax-free capital gains as of June 25, 2024. This is an increase from the 2023 limit of $971,190, making it an even bigger win for business owners planning to sell.
This tax break is notable for business owners who want to retire or reinvest their profits, as it significantly reduces the capital gains tax burden when selling shares. Plus, the LCGE is indexed to inflation, meaning the limit will continue to rise over time, offering even more long-term benefits.
However, with the capital gains inclusion rate increasing from 50% to 66.7%, a larger portion of your capital gains could be taxable if you exceed certain thresholds. However, for most small business owners, the LCGE still provides substantial tax relief when selling a business.
🛡️ Limited Liability: Protect Your Personal Assets
While not a tax benefit, incorporating also provides the significant advantage of limited liability. Incorporation separates your personal assets from the business’s liabilities, which means your home and personal savings are protected in the event of financial or legal issues faced by the business.
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🎯 Quick Takeaway:
Incorporating your business in BC offers numerous tax advantages, from lower corporate tax rates and income-splitting opportunities to tax deferral strategies and capital gains exemptions when selling your business. Plus, you get the added benefit of limited liability protection for your personal assets. Incorporation is a smart move for entrepreneurs looking to grow and maximize their tax savings.
💬 Ready to Incorporate? Let’s Talk!
At Raman Nat Inc., we help small businesses navigate the incorporation process and ensure you maximize all available tax benefits. Contact us today to learn how incorporating can take your business—and your tax savings—to the next level!
About Raman Nat Inc.
Raman Nat Inc. Chartered Professional Accountant is a trusted tax consulting firm located in Vancouver, BC, offering specialized financial services to professionals and small businesses. Our comprehensive suite of services includes corporate tax planning and preparation, bookkeeping, financial consulting, and business advisory, all designed to meet the unique needs of our diverse clientele. Contact: info@rncpa.ca
