Firstly, the concept of an LLC does not exist in Canada. Accordingly, as a person working alone you must choose between a corporation or sole proprietorship (registered business).

Corporation

From an income tax perspective, assuming your business is considered as an active business, you may benefit from the federal, and possibly provincial, low tax rates on your first $200,000 of annual active business income. Moreover, certain provinces grant a tax holiday for new corporations which conduct active business in Canada.

Another benefit of the corporate structure is the ability to access the $500,000 capital gains exemption on Qualified Small Business Corporation (“QSBC”) shares. In short, provided the shares of a QSBC are held for at least two years by you and the corporation maintains certain tests with respect to the fair value of assets used in active business in Canada during that period and on an eventual disposition, the first $500,000 of capital gains will be tax free. It should be noted that the ability of an individual to access this exemption may be reduced based on certain income tax claims made by the individual in the past.

Additionally, the federal Minister of Finance has recently introduced rules allowing an individual who disposes of certain private active companies to defer the taxation of the first $2,000,000 of the capital gain where that individual has reinvested the proceeds in a new active private company within a limited timeframe.

Another advantage of the corporate structure is that it allows flexibility in who can be shareholders. This may allow for estate and family income planning. This type of planning should be reviewed with a qualified tax advisor to ensure that no adverse implications result.

If an independent contractor creates a corporation and it is determined that in fact the individual is not an “independent contractor” but rather a disguised employee of another business, then the corporation may be considered a “personal services business”. As a personal services business, the corporation will be subject to a higher rate of taxation and will be limited in the deductions it can claim.

Another disadvantage of corporations is that any losses incurred in those corporations are trapped in the corporation and may not be accessed by the individual shareholders. Moreover, if the individual shareholders need funds to support their lifestyle, such amounts may either be taken out as salaries or dividends. In simple circumstances this may add an extra level of complexity.

Registered Business

A registered business is useful during start up years where, if losses are incurred during those years, such losses may be utilized by the individual shareholder to shelter income from other sources. If the registered business is earning income, however, such income will be taxed at the higher individual marginal rates. Also, if you decide to incorporate the business in the future, it is unlikely that you will be able to access the provincial tax holidays.

Disclaimer

The nature of this facility is to provide a general response to a general question. Under no circumstances should anyone act on this information without obtaining analysis and counsel from a qualified advisor with respect to the specific situation.

Phillip Nadler, CA
Richter Usher & Vineberg
http://www.richter.ca