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Should you incorporate your business?

Many self-employed workers decide to incorporate their business to take advantage of the tax benefits granted to corporations. But is that the right thing to do?

Self-employed workers are attracted to the tax benefits granted to corporations, such as:

  • lower tax rates
  • net revenue can be left in the corporation
  • children and spouse can be included as shareholders
  • getting paid with dividends

Consulting an expert

Deciding to turn your business into a corporation is an interesting alternative that must be discussed with legal counsels and tax experts as many qualitative criteria have to be taken into consideration.

Incorporating your business can be advantageous if you:

  • want to limit your personal liability with the company's creditors
  • don't need all the cash generated by the business to pay for your personal expenses

In fact, a company's net revenue is often taxed at a lower rate than that of an individual. As a result, more cash remains available for the company to invest or use towards equipment. It's also interesting to be able to add other family members to the company and split the income, subject to particular tax laws applicable to minor children.

Incorporated employees, under watch

Over the years, tax authorities have introduced enough strict laws to render incorporation less attractive. There was the addition of a new definition: employee profit sharing plan (EPSP). It's the status of incorporated employees, meaning incorporated businesses or incorporated companies, used by individuals to provide services to clients, when it is deemed that the individuals would have been in an employment relationship if they hadn't interposed a corporation between themselves and their clients.

Tax laws set out various restrictions for companies that meet this definition so that the tax amount paid by the company is at least equal to the amount the individuals would have paid had they been employees. A corporation that employs more than 5 full-time workers year round is not considered to be an EPSP.

A corporation that qualifies as an EPSP is not allowed to claim expenses the employee would have claimed as a worker, which excludes, amongst others, fixed assets depreciation (except the equivalent of what is allowed for an employee), bank fees, repair and maintenance costs.

6 criteria to determine a worker's tax status

It's necessary to determine if the relationship between the individual carrying out the work and the person who hired them is for the individual one of employee or self-employed worker. The following 6 criteria are generally used to determine a worker's tax status:

  1. Actual subordination of the work
  2. Economic criterion (risk of profit and losses)
  3. Ownership of supplies and material (computer, desk, etc.)
  4. Integration of the work done by the worker
  5. Intended result
  6. The parties' attitude regarding their relationship

Subordination: When the contractor still has a boss

The 6 criteria apply to all workers, but the subordination criterion remains the essential element in Quebec. So workers who have a supervisor on a daily basis will practically always be deemed employees, not self-employed workers. In the absence of subordination, all criteria must be examined.

A few years ago, Revenu Québec granted special status to incorporated IT consultants, which provided them with a specific interpretation and a revision of the criteria that determine a worker's tax status based on situation, particular work context and client-imposed constraints.

Your business's legal structure could have legal or tax consequences and could even affect its image. Take the time to consider all contributing factors before making a decision.

Don't hesitate to consult a notary or corporate lawyer to guide you through the process.