As of January 1, 2010, the corporate tax rate fell to 18 percent. Next January it will fall to just 16.5 percent. According to BusinessWeek.com, Canadian small business owners will benefit from income tax reduction as the Department of Finance Canada attempts to give new companies the lowest tax rates to date in a recovering climate.
Business owners can take advantage of these reduced rates through business incorporation. Incorporation may seem like a hassle - but it doesn't have to be.
There are a number of online incorporation services that can help entrepreneurs file the appropriate documents with the click of a mouse. Devoting a little time to incorporating your business can really pay off in the long run thanks to tax benefits the process affords small businesses.
Here's a look at a couple of the biggest tax advantages entrepreneurs are offered by business incorporation.
Keep cash now through tax deferral
A corporation has lower tax rates than individuals. Business owners who incorporate are taxed at the corporate level instead of having to pay income tax at the higher, individual rates.
A small business incorporated in Canada and privately owned qualifies as a Canadian controlled private corporation. It can claim the Small Business Deduction. This is a reduced income tax rate on the first $200,000 of a company's annual taxable income.
For shareholders, this translates into the ability to defer the payment of income tax. According to TaxPage.com, when corporations are eligible for the Small Business Deduction, shareholders are left with the remaining tax once they receive dividends from the business. But shareholders can defer these taxes.
This means business owners will have the chance to put off taxes until they are in a lower tax bracket, thereby maximizing savings. Deferral is also an option that can nearly double the funds available to invest in a new or expanding company.
Want to get out of business? Gain from capital gains exemption
Small business corporations - and corporations only - benefit from a $500,000 capital gains exemption on the sale of a business. This is a very specifically targeted exemption, but a substantial one nonetheless.
Entrepreneurs who have owned a company for at least two years prior to the sale can claim this exemption as long as 90 percent of the assets are used in the active business.
Since this is not an option for sole proprietorships or partnerships, the exemption is a prime benefit to incorporation even (or perhaps especially) for those entrepreneurs who may not be in a business for the long haul.
Prepare for the future tax environment with incorporation
These benefits might really come in handy in light of some changes the tax environment for small businesses will see in the coming months.
Effective July 1, 2010, the Harmonized Sales Tax will be introduced in British Columbia and Ontario. This means these provinces - along with Nova Scotia, New Brunswick, Newfoundland and Labrador - will be responsible for collecting the GST and provincial taxes simultaneously on their goods and services.
This has the potential to change the way small businesses file taxes. Why not take these changes head on through incorporation and make sure small businesses generate savings through every possible method?
Since many small business owners have likely taken care of 2009 tax returns, it might be wise to put last year's finances in the past and look ahead to how to take advantage of potential savings in 2010.
Professionals at online incorporation services can give information about other benefits of incorporation - from limited liability of shareholders to corporate credibility. Start the next decade with new tax benefits from incorporation.
