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Should I Incorporate?:  Companies And Tax Considerations in Nova Scotia
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Should I Incorporate?: Companies And Tax Considerations in Nova Scotia


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Income tax, liability, securities and cost implications of incorporating your business, sole proprietorship or partnership in Nova Scotia

Income tax, liability, securities and cost implications of incorporating your business, sole proprietorship or partnership in Nova Scotia

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  • 1. Should I Incorporate?
    Sole proprietorship – Partnerships – Incorporation under Companies Act (Nova Scotia) - Income Tax Act (Canada)
    Prepared for a presentation at DEMOhub, November 16, 2009
    Christian Weisenburger Law, Inc.
  • 2. outline
    Transferring existing business to a Company
    Liability Implications
    Income Taxation
    Income Tax Credits
    Investment and Transferability
  • 3. COSTS
  • 4. start-up costs
  • 5. ongoing and wind-up costs
  • 6. Costs and complexity to convert to a company from a partnership or sole proprietorship
  • 7. transfer of existing business to Newco
    Business Assets
    Tangible assets
    Accounts Receivable
    Intellectual Property
    Tax Consequences
    Without tax-planning, capital gains tax, recapture, HSTand other negative tax consequences can be triggered on the transfer as transferor is generally deemed to have disposed of such assets at their fair market value(i.e. and not their original cost amount)
    Tax saved due to losses claimed in relation to the business in the past may be now payable
    Sole proprietor or
  • 8. assignment of contractual rights to Newco
    Real Property Lease
    Equipment Leases
    - e.g. photocopier
    Supply Contracts
    Purchase Contracts
    Warranty Rights
    Business licenses
    Franchise or IP rights
    (often requires consent of other party to be assigned)
    Sole proprietor or Partner
    agreements often cannot be transferred without the other party’s consent
    watch out for clause in some leases that allow lessors to walk away from agreement in the event of transfer (and rent to someone else for more if they elect to do so)
    Newco may not be entitled to warranty rights (i.e. if transferred equipment later breaks)
    insurance policy, business licenses, tax accounts (e.g. HST) (often) cannot be assigned and have to be applied for by Newco
  • 9. assumption of obligations by Newco
    Obligations under contacts (e.g. pay amounts required under lease)
    (requires consent of creditor for assumption to be binding)
    Sole proprietor or Partner
    obligation to pay interest on debt must be assumed by Newco for the payment to be tax deductible to Newco
    failing to get consent for the loan assumption may put the loan in default, making it immediately payable in full
    likely creditor will not consent to assumption unless transferor agrees to personally liable as well (i.e. personal guarantee)
    tax considerations may come into play if amount of liability assumed by Newco is greater than the value of the business assets transferred to it
  • 10. conversion costs
  • 11. summary
    companies are expensive to set up, maintain and wind-up
    better to avoid if possible by not incorporating
    if incorporation will be necessary in future:
    present costs and tax implications have to be weighed against conversion costs and complexities that otherwise wouldn’t have been triggered if business was initially set up in a company
  • 12. Liabilities
  • 13. examples of business liabilities
    Breach of contract, e.g:
    failure to perform as required or on time
    failure to repay loan as required
    Breach of Intellectual Property rights, e.g.:
    using copyright without permission (e.g. source code)
    using similar trademark to one registered by others
    Tort, e.g.:
    slip and fall (occupier’s liability)
    Environmental and Regulatory
    Vicarious, e.g.:
    liability for acts of employees
  • 14. liabilities – sole proprietor
    Sole Proprietor
    personal assets
    business assets
  • 15. liabilities – partnership
    personal assets
    business assets
    • partners are each personally liable for all of the obligations of the partnership, even if the obligations were entered into by another partner without their approval
    • 16. merelyinvesting in a friend’s business (other than as a loan) likely makes you their partner
    • 17. you can be deemed to be a partner even if the partnership is not registered at the RJSC
    • 18. for these reasons, most investors require incorporation
  • 19. liabilities - company
    • However, corporate shield does not protect against:
    • 20. Fraud
    • 21. Director liability (e.g. HST, unpaid source deductions, environmental, workplace)
    • 22. Certain torts like inducing breach of contract
    • 23. Lenders and lessors often require personal guarantees, which circumvent the protection of the corporate model
    business assets
    personal assets are shielded from corporate liabilities
    personal assets
  • 24. INCOME Taxation
  • 25. tax rate comparison: earn business income personally vs. in a company
    (corporate tax)
    between 3% and 28%
    (personal tax on dividend as % of original profit)
    It is now slightly more tax efficient to earn business income in a company and pay dividends vs. earning it personally (as a sole proprietor or partner)
    between 19% and 44%
    (total personal and corporate tax on business income)
    between 24% and 48%
    (total personal tax on business income)
    Sole proprietor or
  • 26. tax rate comparison: income splittingearn business income personally vs. in a company
    16% $10,400 Tax
    (corporate tax on $65,000 of corporate business income)
    $27,300 dividend
    $27,300 dividend
    Shareholder (spouse)
    Income splitting by utilizing the low marginal tax rates available to family members allows for significant tax savings
    * Due to combined benefit of dividend tax credit and personal exemption (approx $10,000); Assumes that the Shareholder and spouse have NO PERSONAL INCOME FROM OTHER SOURCES
    32% $20,100 Tax
    (approx. effective personal tax rate, including CPP, on $65,000 of business income)
    Sole proprietor or
  • 27. corporate tax can be higher than shown if the company does not qualify as a “Canadian Controlled Private Corporation” or earns income $400,000+ in a year
    Unlike a partnership or sole proprietorship, corporate losses cannot be set off against other personal income of the owner (and instead are useless unless the company makes a profit in the future)
    if the shareholder does not immediately want to personally spend the profits earned in the company, delay the dividend so that only 16% tax is paid; however
    leaving cash in company makes it available to creditors and could have the effect of inadvertently loosing the availability of the capital gains exemption (i.e. $750,000) on the sale of shares in the company;
    tax planning should be considered to reduce these concerns
    tax rate comparison: earning business income in a company
  • 28. tax incentives to use a company
    The following tax incentives are only available if the business is incorporated:
    $750,000 capital gains exemption
    growing the business in a company can save each owner tax they would have paid on up to $750,000 of capital gains as the business grows and is subsequently sold
    also would apply to save capital gains taxes that might otherwise be applicable on the death of shareholder
    3 year tax holiday – NS small business tax credit
    requires 2 employees, 1 being full time and at arms length
    NS equity tax credit
    tax credit equal to 30% (35% after January 1, 2010) of equity investment into qualifying companies, deductible against NS personal tax of shareholder
  • 29. Investment and transferability
  • 30. investment and use a company
    Usually companies are financed by a nominal payment from shareholders (e.g. $10) as equity, and the remainder is debt financing, however
    certain banks and institutions (e.g. BDC) require a minimum equity investment
    NS Equity Tax credit is available only for equity investments
    Investors often require incorporation:
    so that they are not at risk of being deemed to be a partner (i.e. making all of their assets available to creditors of and claimants against the business)
    corporate legislation and constating documents are long and relatively worked out (i.e. allowing for proper corporate governance)
    in contrast, the Partnership Act (Nova Scotia) is short and not as many protections to investors apply by default
    rules applying to the transferability of ownership interests in companies is more settled than those of other business structures
    partnerships technically terminate with each change in partnership; whereas companies are stable and shareholders death or change in ownership has no effect on existence of entity
  • 31. investment and use a company
    Securities law restrictions:
    you cannot sell or issue shares in a private company to persons who are not:
    Close personal friends
    Accredited Investors (e.g. $200,000+ income per year or $1 million+ in net assets)
    Buying enough shares to take over control
    Other prescribed persons
    i.e. once you buy shares of a private company, you are generally stuck with them if you can’t find someone in these categories to sell to
    (Same prohibitions apply with respect to purchasing partnership interests)
  • 32. lender contacts
    Clients looking for (small) loans have received strong service from the following contacts:
    BDC, Danny Connors,
    BMO, Lisa M. Miller,
    CIBC, Ian Lewer,
    INOVA Credit Union, Gerry Latta,
    RBC, Derek Stone,
    TD Canada Trust, Tracy Kempton,
    Available financing and other considerations when starting-up are described here:
  • 33. summary
  • 34. contact
    Christian Weisenburger
    Christian Weisenburger Law, Inc.
    (902) 412-1461
    Download presentation at business blog: