Should I Incorporate As An Employee?

by Tax Guy - Burlington Accountant on October 15, 2008 Print This Post Print This Post

Does it make sense to incorporate as an employee and take advanatage of the benefits of a business?

I have been offered job and I understand that tax could be reduced if I establish a corporation with myself and my wife as shareholders.  What type of tax savings could I realize if I were to incorporate?

Businesses have a wider range of income deductions available to them over the employee and the small business deduction makes incorporation an attractive option for a profitable company.  Why not establish an corporation, hire yourself and the sign an agreement with your former employer to provide the same work? 

First of all, being a corporation and providing the same services relieves your employer from providing benefits.  Your employer will no longer needs to provide you with medical and dental benefits or other benefits and you will be responsible for sourcing and providing these benefits yourself.  Your company will also be subject to its own liability and your former employer may not need to protect you from any lawsuits that may result from your actions.

On the tax side however, there are, in my opinion, no benefits.  The Income Tax Act deems these sorts of corporations as personal services corporations.  Personal services corporations are thus denied all expenses except those that would normally be allowed to an employee.  In addition, the small business deduction is not extended to the personal services corporation.

Given the way in which integration between corporate and personal income taxes works in Canada, a person working in Alberta and earning $160,000 would have an average tax rate of 31.23% (in 2008).  A personal services corporation earning $160,000 of income and flow that income out to its shareholders would result in an average tax rate of 44.7% to the shareholder.  Thus, unless a corporation is an active business, there is little benefit to incorporation and may result in higher tax.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 3 comments }

Big Cajun Man October 28, 2008 at 8:20 pm

This is very interesting because as a possible “contractor” to the government, there is some pressure to “Incorporate” and I keep hearing about how great it will be and how much money I might save on taxes and such, but I suspected that this is not really the case at all. We shall see whether I actually incorporate (for that reason).

–C8j

Tax Admin October 29, 2008 at 4:53 pm

I’ve been following your situation.

Paley Business Consulting Services July 22, 2010 at 12:08 pm

If you are considering incorporation, give me a call at 905-339-9237. We can help you determine if incorporation is right for you and then make it happen.

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