Incorporating Your Problems – Part 1 of 4
This is a summary of a seminar I presented for my CPA chapter some years ago. Everything I’m saying is solely my own experience and based on when I was in practice, and only in the Province of British Columbia. It is not meant as advice. I’ve also tried to make this really simple, but in fact it is way more complicated than I describe, because, let’s face it, I’m abridging and the government never does anything in a simple fashion.
Many times, people come to me and say “My (golf pro) (doctor) (psychic) has told me I need to incorporate. So how do I do that?” My response is always to ask whether they are aware of what it means to be incorporated and to ask them the reasons for incorporating. Because sometimes you just incorporate your current problems.
As we all know, Canada Revenue Agency (“CRA”) expects every person (corporate or otherwise) to declare all income earned. A corporation has its own tax return and has to pay tax on the income it makes, less those reasonable expenses. So, to begin with, when you incorporate, someone has to put some money into the company. This is called “capital”. You subscribe for shares – thus you become a “shareholder” and you “share” in the profits. That is what the shareholder section of your balance sheet is.
But sometimes you want to share the profits with other family members, or those good friends who are helping capitalize the company. The biggest mistake I often see is incorrect share structure. Most people just incorporate themselves and accept the standard share structure from BC Online. And remember my lesson on how it costs more to fix a mistake – that’s why not getting legal and tax advice to begin with can cost you more at the end.
Next, you need to be mindful of both the BC Business Corporations Act (including any Regulations) and the Income Tax Act (also including any Regulations). If you give your adult son 5% of the company and think he’s going to get a bunch of money free, then TOSI will be a big surprise. And have you considered what happens if you incorporate in one Province, but move to another? If you’re planning a move, make sure you know about the rules for residency.
If you do get a lawyer, they will consider other Acts of law that may apply to you such as
CPP Act http://laws-lois.justice.gc.ca/eng/acts/c-8/index.html
Employment Standards http://www.bclaws.ca/civix/document/id/consol22/consol22/00_96113_01
Provincial sales tax act http://www.bclaws.ca/civix/document/id/complete/statreg/12035_00
Excise Act http://laws-lois.justice.gc.ca/eng/acts/E-14/
Legal Profession Act http://www.bclaws.ca/civix/document/id/complete/statreg/98009_01
If you are doing this yourself, you will need to know the above. It should be noted that incorporating may trigger some of these inadvertently. For example, maybe you are calling yourself a director and think that means you have no employees while paying “director fees”. Remember a rose by any other name…..
The second take-away is that while some people may indeed self-incorporate, others get their “friends” to help them. And they may even pay that “friend” for something that is done very badly.