Incorporation & Owner Compensation

A consultant had been operating as a sole proprietor for four years. Income had roughly doubled, and with all of it taxed personally the client was pushed into a higher bracket and paying instalments that consumed most of the increase.

They had been told repeatedly to incorporate, but nobody had shown them the arithmetic for their own numbers, and a new client contract required a corporate entity.

What the Client Needed

An evidence-based answer on whether incorporating made sense at their income level, and if it did, the company set up correctly from day one — registered, with the right CRA accounts open, an opening balance sheet that reflected the assets moving across, and a compensation plan that did not create a surprise personal tax bill in the first year.

What We Did

We modelled three years of projected income under a proprietorship and under a corporation, including the small business deduction, personal tax on the amounts actually drawn, CPP contributions and the cost of the extra filings. The difference justified incorporating, so we proceeded.

The company was incorporated in British Columbia, CRA program accounts were opened for corporate income tax, GST and payroll, and the assets of the proprietorship were transferred at fair value with the opening balance sheet documented. We set a salary and dividend mix that preserved RRSP contribution room while keeping the client below the next personal bracket, and put a schedule of corporate instalments in place.