The small business deduction effectively lowers your  corporate tax rate to about 12.5% in Ontario on the first $500,000 in  each year. There are certain eligibility requirements for the small business deduction. First, it’s available on your active business income only (not income from passive investments) and second, it is only available to Canadian Controlled Private Corporations (raka "CCPCs"). This is only a deferral meaning that once you pull money out of your company it becomes your personal income and is taxed at the marginal tax rates on your T1 return. To the extent that you can leave the earnings in the company. To the extent that you can leave the earnings in the company, the deferral “lives” and you can use the additional money to grow and invest in your business at a lower tax rate.

When selling shares in certain types of corporations, you may be able to take more than one (1) million dollars tax free capital gains In other words, the lifetime capital gains exemption may entitle you to avoid paying capital gains tax on the proceeds of the sale up to your lifetime exemption limit of approx. $1,016,836. There are  eligibility requirements. Generally speaking, the exemption is available on sale of shares by an individual who has held the shares for at least 24 months. You can read about some of the other eligibility requirements in our free gift. Note that if you don’t use the entire exemption amount in one transaction, the balance can be carried forward.

A corporation is considered a separate legal person. This means it can enter into contracts, borrow money and own property. According to the theory of limited liability, if a corporation is a party to a contract, that corporation alone should be liable for its breach of the contract. Or, if a corporation borrows money, it alone should be responsible to repay the loan. Thus, the concept of limited liability means that a corporation is seperate from its owners who are not generally responsible for its debts, obligations or liabilities.
Keep in mind that limited liability is a general rule and there are definitely exceptions in the real world. For example, if your company borrows money from a bank, they usually require that you personally guarantee repayment of the loan. Or, if your company wants to lease commercial space, the landlord may ask that you personally guarantee payment of the rent. There are ways to minimize personal guarantees, but be aware that the limited liability protection of a corporation is not absolute. You should also know that directors of a company have personal responsibility in certain circumstances. Specifically, if your company owes money for taxes or employee deductions to the government, you as a director can be held personally liable for these amounts.

Incorporation is not the right fit for every business. Along with the advantages noted above, there are additional advantages and disadvantages of incorporation that every entrepreneur. We have covered some of these points in our Listicle here, “Ten Tips Every Entrepreneur in Ontario Needs to Know about Corporations Right Now”, including: 

• Perpetual Existence
• Advantages when Raising Capital
• Easier to Include Multiple Owners
• Tax Advantages when transferring Ownership
• Avoiding Transitional Expenses Later

If you want to learn more about a corporation raising capital through debt or equity, [check out this article].