Category

Tax

Should you incorporate? Read on to find the answer.

Should you incorporate? Read on to find the answer.

To incorporate or not to incorporate? The answer really depends on your particular situation, but we will cover some of the main pros and cons so you can make a decision.

Limited Liability

One of the main advantages of incorporation is the limited liability of the incorporated company. Unlike the sole proprietorship, where the business owner assumes all the liability of the business that is being carried on when a business becomes incorporated, an individual shareholder’s liability is limited to the amount he or she has invested in the company.

As a sole proprietor, your personal assets could be on the line if there’s a legal claim against you by one of your customers, employees or contractors.

Taxes and Deferrals

If you are incorporated, you have more freedom to determine how much and how to get compensated for your efforts and contributions. You can get paid via salary or dividends and also leave the excess earnings in the corporation allowing for tax deferral. If you own Canadian-controlled private corporations or CCPC, the corporate earnings are subject to a beneficial corporate tax rate. Also, the first ~$30,000 of dividends generally, do not bear any personal level of taxation.

Losses

Generally, during the initial years, you may incur losses. If the business is incorporated, the losses would remain in the corporation and would be applied against future income.  As a sole proprietor, business losses would be deductible against all types of income.  Depending on your personal situation, carefully examine whether you want business losses to reduce your personal income tax or remain in your business, and time your incorporation accordingly.

Selling your business

It is easier to sell an incorporated business rather than a sole proprietorship. You may also be able to take advantage of the lifetime capital gains exemption if you sell shares of your business. On the disposition of a qualified small business corporation shares, the exemption is up to a lifetime limit of ~$800,000 of capital gains.

Incorporation comes with some disadvantages.  The setup costs in Canada could be as much as $2,000 (including legal fees) and you would also be required to file taxes annually, however, in many cases, the benefits of incorporation outweigh the administrative and set up costs. Contact us today to find out if incorporating your business makes sense for you.

Exceptions to the US Residency Substantial Presence Test?

Exceptions to the US Residency Substantial Presence Test

You will be considered a United States (US) resident for tax purposes if you meet the substantial presence test for the calendar year. This test boils down to counting your days in the US. You can also be considered a US resident if you have a lawful permanent residence (a green card) in the United States.

To meet the substantial presence test, you must be physically present in the US on at least:

1. 31 days during the current year, and

2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

  • All the days you were present in the current year, and
  • 1/3 of the days you were present in the first year before the current year, and
  • 1/6 of the days you were present in the second year before the current year.

However, there are certain exceptions to this “presence” rule, including:

  • days you commute to work in the US from a residence in Canada if you regularly commute from Canada;
  • days you are in the US for less than 24 hours when you are in transit between two places outside the United States;
  • days you are in the US as a crew member of a foreign vessel; and
  • days you are unable to leave the US because of a medical condition that develops while you are there.

Also, there are also several categories of exempt individuals, which include:

  • an individual temporarily present in the US under certain foreign-government-related visas;
  • a teacher or trainee temporarily present in the US under a J or Q visa
  • a student temporarily present in the US under an F, J, M, or Q visa; and
  • a professional athlete temporarily in the US to compete in a charitable sporting event.

In general, these individuals can exclude days in the US for the purposes of the substantial presence test. To do, an individual would need to file IRS form 8843.

Even if you do not qualify for one of the exceptions noted above, you may still be treated as a non-US resident if you can meet the closer connection exception or if you qualify as a resident of another country under an income tax treaty. The more common exception is to have a closer connection to a foreign country, which is determined on the basis of an individual’s circumstances. Form 8840 must be filed with the IRS to claim this exception.

Given that US residents are required to file annual US income tax returns and report their worldwide income, Canadian individuals should be aware of the US residency rules, especially if they are spending significant time across the border. Those spending time in the US should consider whether they qualify for an exception to the substantial presence test, such as the closer connection exception.

Please contact us if you have any questions pertaining to your specific circumstances.

About the firm

Vlad Alyokhin, CPA, Professional Corporation
140 Yonge Street, Suite 320
Toronto, Ontario
M5C 1X6

T: 647-598-8777
E: vlad@alyokhincpa.com