Incorporating Your problems – Keep this in mind (Last Part 4 of 4)

Continuing on from the previous 3 posts, same caveat.

This is the final chapter.

Some people incorporate thinking that “they” (whoever “they” is) won’t be able to touch their assets. Keep in mind that the courts have, in the past, pierced the “corporate veil”. Incorporating to hide assets doesn’t always work.

Some people incorporate thinking it will save their assets from a CRA personal debt. It won’t.

Some people incorporate and create things in the corporation but then realize they have to pay tax so they just stop paying tax. And the debt gets larger. And becomes overwhelming. Don’t do this. Deal with it.

Some people incorporate and don’t realize that if they are taking out some fees, they may be an employee and there may be payroll expenses. Make sure you understand this.

Some people incorporate thinking they can get loans through the company that they couldn’t otherwise get, but most banks want you to give a personal guarantee. That means it is just the same as if you had done it personally.

And while there are valid tax reasons to incorporate, there are some good reasons to incorporate that are not tax related.

  1. You may want to protect the name locally. And before you say that you can always register the name personally, check the rules. It may not apply in your case.
  2. You may want to protect some incredible assets. Maybe you invented something and want it to be separate from you or easier to pass to younger family members.
  3. Maybe you want to appear larger or more formal. You may incorporate for appearance sake. Or you may need to be incorporated as a condition of bonding.
  4. You may have a requirement for a job to be incorporated. I’ve run across some contract jobs that required it.
  5. You may want to limit the liability for legal reasons and want to keep the work separate from your personal assets. But keep in mind the whole “corporate veil” thing so it may not work the way you want it to.

Finally, why would you want to hire a public accountant.

First, the BC Business Corporation Act requires financial statement production unless all shareholders voting or otherwise waive this.  But does that provide the appropriate due diligence as CPAs if we are preparing the tax return?  If we don’t due even a minimum compilation standard requirement how are you going to know who all the shareholders are and whether they have all waived this?

Second, keeping a set of books:  Many clients come to us and give us the same shoebox or bag of receipts they would otherwise keep ignoring any requirement to keep a set of books and records

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/kprc/whkp-eng.html

Third, some things I’ve heard in my career:

  • Why should I pay you to prepare a financial statement?  I don’t need to know how my business is doing. But if you think you don’t need to know how your business is doing then are you really operating a business with the intent to have a profit (reasonable expectation)?
  • Why does it cost so much to have a year end done? Shouldn’t this be free if it’s for the government? But remember, you aren’t just paying for your current work. You are paying me with my 16 years of post-secondary education to look at your problem and apply professional judgement between the bookkeeping job your sister-in-law the English teacher did and what the Income Tax Act requires. We charge for our time and skill. Hire a professional because we won’t do this while riding the Skytrain between our regular job and home and letting everyone on transit know your personal problems.
  • My employer has told me I have to incorporate so they don’t have to pay payroll taxes. Or they said I’ll pay less tax. Or they said I’ll pay no tax because corporations don’t pay tax. If that’s what you’re going to tell me, go read https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4012/t2-corporation-income-tax-guide-chapter-4-page-4-t2-return.html#P2893_211410 first. Make sure you understand what a Personal Services Business is.
  • A major problem we hear when clients come to ask about incorporating – IF they ask first – is they either tell us too much or not enough. The time to tell me you have shares in other corporations, or that you want to incorporate solely to write your mother-in-law off is at the beginning of our relationship.

And finally, in conclusion,

  • If your business is making money and you would pay tax on it personally if you were unincorporated, a corporation will pay tax on it and you may pay tax when you take the money out.
  • If your business is losing money, incorporating won’t change this.
  • If you incorporate yourself thinking that you can hide your assets, this is not the way to do that.
  • If you think you can hide from your creditors by incorporating, you can’t.
  • If you think you can just income split by paying a family member arbitrarily when you like regardless of your share structure, you can’t.

Remember a good professional (lawyer, accountant, whatever) is well worth it in the long run. Hopefully this series has given you some food for thought – even if it is just hard cheese.

RESOURCES:
CRA http://www.cra-arc.gc.ca/menu-eng.html
Income Tax Act http://laws-lois.justice.gc.ca/eng/acts/I-3.3/
BC BCA http://www.bclaws.ca/civix/document/id/complete/statreg/02057_00

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