Tips for Incorporation Canada

Allan Madan, CA
 Jul 26, 2012

This article is about business tips for incorporation Canada. It is really important that you read this article if you are thinking of incorporating. I am going to tell you the pitfalls to avoid and the best practices to use for your incorporation. So, let’s get started.

Tips for Incorporation Canada – Number One:

Incorporate to save tax. Corporations pay a very low rate of tax of only fifteen and a half percent for the first $500,000 of profits. Contrast that to an individual who pays up to 46.4% in personal income taxes. So, that is a tax saving of 31% just by incorporating, that’s a lot of money, and that is precisely why this is amongst the most important ‘tips for incorporation Canada‘ .

Tip Number Two:

Be careful when choosing between provincial incorporation vs. federal incorporation. If you plan on doing business in Ontario or in your home province then provincial incorporation is fine. If you plan on doing business outside your home province then you should choose federal incorporation.

A couple of points to keep in mind; number one, Industry Canada requires all federal corporations to file an annual return; that costs money and takes time. This is not required if you are a provincial incorporation. Secondly, it’s more expensive to incorporate provincially than federally because the provincial fees for incorporation are higher.

Tip Number Three:

Make sure you have separate classes of shares in your incorporation documents. Why do you need separate classes of shares? Well, if there is more than one person who is the shareholder of the company, for example, you, your business partner, or your spouse, then separate classes of shares will allow the corporation to pay dividends in different amounts to each shareholder.

There may be a case or situation where one shareholder needs to get more money than the other by way of dividends and separate classes of shares allow for that flexibility. Separate classes of shares are also a great income splitting tool, so both shareholders pay less tax overall; and when it comes to tips for incorporation Canada, this is one you should not forget if you have a partner or more.

Tip Number Four:

Select the board of directors wisely. Remember that when you choose your board of directors they will have control over operations and strategy of your business. So, it is really important that you trust the board members that you are appointing. If it’s a very small business, perhaps it is going to be only you and your business partner who are board members.

Tips for Incorporating Company Canada – Number Five:

Credit or proof your assets with a holding company. What does that mean? I will make it simple. A holding company is a corporation and that corporation owns the shares of your operating company, your business, which is also a corporation. Whenever your operating business, your main business, has excess cash it should pay a dividend of that excess cash to the holding company.

The dividend is tax-free. What we have really done is transferred cash from the main company to the holding company. Why are we doing this? Well, if there is ever a lawsuit against the operating company it has very little cash because all the cash belongs to and is held by the holding company. It will reduce the risk of loss in the event of a lawsuit.


The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 19

  1. I’m considering taking a job as an emergency physician in Ontario. I’m currently an American Citizen and resident and though I intend to seek Canadian permanent residency and eventual citizenship I will have US tax paying and filing obligations for the immediate future.

    Any thoughts on how incorporating as a physician in Canada would affect my situation?

    1. Hi Miranda,

      The main tax advantage of incorporating as a physician is that you can defer paying income tax on your professional income by retaining most of your income inside the corporation. The corporation will pay a salary to you so that you can continue to enjoy and pay for your lifestyle. The corporate tax rate for Canadian corporations held by Canadian residents is only 15.5%, which is why many professionals incorporate their practices.

      The salary you earn in Canada will be taxable to you in the US. But you will receive a foreign tax credit in the US for the Canadian taxes paid, thereby reducing / eliminating double taxation.

      Please let me know if you have any questions.

      Allan Madan, CPA, CA

  2. Hi Alan

    You said: ” Industry Canada requires all federal corporations to file an annual return; ”

    That annual return cost amount that Industry Canada charges — on the balance sheet: will it be counted as a capital asset that depreciates over the year (ie because its value lasts for only a year until you have to pay it again) with its accompanying amortization amount or can it be recorded as a yearly expense on the balance sheet?

    Also what GIFI would I use in either case?


    1. Hi Dhiraj,

      The fee paid to Industry Canada to process the annual return is a current expense and should be reported on the form G125.

  3. Hi Alan, please let me ask you two questions regarding holding company.
    1. when dividends are paid from main company to holding company, isn’t there a dividend tax?
    I read somewhere it’s about 33%??
    2. From your article “Sole Proprietorship vs corporation”, you mentioned that the professional corporation
    can give 2% interest loan to holding company for investment. If the dividends are really tax-free,
    can the holding company just use the dividends they received for investing? Why make it complicated?

    Anyways, I think you are awesome!

    1. Hi Andy,

      Thanks for your questions. Dividends paid by a corporation to its parent corporation (holding company) are completely tax-free so long as the parent corporation owns at least 10% of the shares of the payer corporation. Otherwise, Part 4 tax (33%) will apply to the dividend received.

      The holding company can use the dividend money it receives to reinvest. Interest does not need to be charged, unless there’s a loan between the two companies.

  4. Hi, I’m currently IT Contracting via my own corporation in Canada, but looking to move to the UK next year to do IT contracting. How can I continue to contract part-time for my Canadian client yet still achieve non-resident status? Do I need to shut down my Canadian Corporation and have my UK corporation open a bank account here?

    1. Hi Wayne,

      You can keep your Canadian corporation and still become a non resident of Canada. The treaty with Canada and the UK states that you are a resident of the country where your permanent home is situated. A permanent home can either be rented or owned.

      Thank You,

      Allan Madan, CPA, CA

  5. Hi Allan,

    I’m planning to buy an existing incorporation company, if the vendor wants to sell all his share of the company and transfer ownership. Is that means a buyer also buy his liabilities too? What happen if the company has debts in the company, is the buyer has to responsible for that? How would I avoid from getting his debts too? Please advice. Thank you.

    1. Hi Lesley,

      If you purchase the shares of a corporation you will inherit its liabilities. Consider buying the assets instead. If you must buy the shares then you should insist on indemnification from the buyer from existing liabilities (both known and unknown).

      1. Hi Allan,

        Thank you for your prompt reply.

        I want to clarify thay what exactly different between buying shares and buying assets of incorporation company beside inherit its liabilities. Are the operation of the corporation the same in both? If buying assets of corporation, do i still own the company?

        What are the disadvantages and advantages of the vendor and of the buyer if I only buy the assets or shares of his incorporation company?

        I got information from my vendor saying if I buy company shares, this way is beneficial for me too as the buyer. Is that truth?

        Please advice.


  6. Like what you said, this is Important for the people thinking of incorporating and I’m the one for that people, that’s why I am really relate for this topic and also very interested, Thank you for the tips you shared about incorporating, you helped me to choose and also for decision.

  7. I have been issued a T4a from my company this year and my job profile is tagged as self contractor . Any guidance on what I can claim in expenses in T2125 …..

    1. Hi Anu, you can claim the following business expenses on form T2125:
      – adveristing
      – meals and entertianment
      – bad debts
      – insurance
      – bank charges
      – office expenses and supplies
      – professional fees
      – travel expenses
      – home office expenses
      – vehicle expenses

  8. Hi Mr. Madan,
    If I have a commervial property downtown Toronto and I generate about $70k in rental income before expenses, is it worth incorpoating? My accountant implied it wasnt worth it if we are not making over 100k. Your answer would be greatly appreciated.
    Thanking you in advance.

    1. Hi Patti,

      You will not save tax by incorporating a rental property in Ontario, Canada. The corporate tax rate will be approximately 50% on net rental income (after expenses). Also, your rental operation is too small to take advantage of the three tier structure.

  9. I am RN with the opportunity to work as a consultant . I will be working on a first nations reserve in Ontario. My first question is in regards to HST, the Band is opt out of paying this, therefore I wont be charging HST. What do I put on my forms? I will be supplying my own equipment and they are paying me a daily rate, I want to incorporate but avoid the PSB issues. Any thoughts

    1. Hi Andrea,
      If the services provided are ‘exempt from HST’, then you do not collect HST and you cannot claim a refund for HST paid on business expenditures. If your net income (after expenses) is $75,000 or higher, then the tax savings from incorporation will outweigh the legal / accounting fees associated with forming and maintaining a corporation. In his case, it would be advantageous to incorporate. You are correct – you have to be careful of the personal service business rules. If it’s determined that you have an ’employer-employee’ relationship with your boss, then a very high corporate tax rate will be imposed on your corporation’s profits, and most tax deductions for expenses will be disallowed.


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