Incorporation – Tips & Traps
The question of whether or not to incorporate can depend on several factors such as limited legal liability, tax planning and circumstances of the services being performed. There are many tips and traps associated with incorporation which should be considered.
- Deductible business expenses related to a corporation are similar to that enjoyed by a self-employed individual. Similar record keeping responsibilities are also required.
- Limited Liability: A corporation is considered as a separate legal entity and can provide protection to its shareholders and directors from creditors in the event of severe financial issues (ie individual’s assets would not be at risk).
- Tax Planning: Corporations in Ontario enjoy the low tax rate of 15.5% (2015) for all taxable income below $500K per year. Tax savings can be achieved by paying out monies to shareholders as dividends. Income splitting also may provide a tax efficient manner to withdraw funds from the company.
- Job Circumstances: Often productions will only allow you work if you are incorporated. Being self-employed is not an option. They will request on a regular basis your Schedule 50 (List of Shareholders) and the company’s annual Notice of Assessment (indicating that the annual filing has occurred).
- One time cost of incorporation and annual accounting fees can be substantial as compared to personal income tax return preparation fees.
- There are numerous filing requirements such as tax, HST and payroll returns, monthly payroll remittances, instalments, etc.
- Income withdrawn from the company must be reported annually on a T4 (wages) or on a T5 (dividends).
- Any business losses incurred must remain within the corporation and cannot be transferred to an individual.
After considering the above-noted issues, the final decision to incorporate should depend on whether or not you can achieve tax savings. You must assess what your taxable earnings would be after deducting business operating expenses and what you would withdraw as a salary. Net corporate earnings should be a minimum of $ 40K per year. After this point, the advantages of being incorporated begins to rise.
Taming the receipt monster
If you’re self-employed, there’s no denying that diligently saving all your business related receipts can make a big difference in your favor at tax time. But sometimes it seems that the pesky things can take on a life of their own.
Here are a few ideas that, if followed, can help keep the receipt monster under control and save you a lot of time and aggravation into the bargain.
The main thing to keep in mind is that it’s easier to keep up than to catch up.
- Set a specific time to pay bills and to empty wallet, pockets or handbag of receipts, and take the time to file both bill statements and receipts.
- Establish one place to store receipts and invest in some organizing tools. A letter-sized accordion file can handle small cash receipts. Label each section appropriately (“Auto”, “Professional Development”, etc.) and file according to category.
- Avoid mixing receipts from different years. Start a fresh collection each year (or corporate year-end, if not December 31).
- If you’ve been traveling for business, avoid mixing currencies.
- Keep personal and business related receipts separately.
- Keep an envelope or small accordion file in the glove compartment of your car to contain fuel, car wash, parking and service receipts. Periodically transfer the contents to your main file.
- Most people remember to ask for a taxicab receipt but if you use public transportation, also remember to ask for a receipt for bus tickets, subway tokens or transit pass. Transfers, though, are not acceptable as receipts. Discard them
- Airline boarding passes are not acceptable as receipts. Keep track of business related entertaining expenses by noting your client’s name and the company or project on the back of the receipt.
- Pet expenses (pet food, veterinary services, etc.) are not allowable expenses except under very special circumstances e.g. you run a security firm and employ trained guard dogs.
- Parking and/or traffic violation tickets are not allowable expenses.
- Credit and debit card receipts often have two parts – the receipt portion showing the item(s) you purchased and the transaction record. To avoid duplicating the amount, staple the two parts together.