TABLE OF CONTENTS

Why incorporate? Annual Requirements of Corporation
Disadvantages Transfer of Existing Business to Company
How to Incorporate Directors and Shareholders
Liabilites of Directors Name vs Number Company
Usual Costs Corporate Wills

Note to Readers: The information provided in this article is a brief summary for information purposes only and is applicable only to the Province of Ontario. It is not intended to be legal advice. Full and complete legal advice can only be given by a lawyer who has detailed information about your individual circumstances.

 

WHY INCORPORATE

  • limited liability: the personal assets of the owner are not liable for the debts of the corporation.
  • income tax: income of the corporation that is kept in the company is taxed at the lower small business Canadian controlled corporation rate of 23%.
  • succession: it may be easier to transfer the shares of a company and the enhanced capital gains exemption of $500,000 is available.
  • investment: people and governmental and other agencies may invest more readily when their liability is limited to their investment.

  

DISADVANTAGES

  • initial cost for legal, accounting and governmental fees.
  • annual costs of maintaining company.
  • an additional layer of paper work and bureaucracy.

  

HOW TO INCORPORATE

An application for articles of incorporation is prepared by your lawyer in cooperation with your accountant; signed by you and submitted by your lawyer to the Ontario or federal government.

 

NAME vs NUMBER COMPANY

  • a name is distinctive and characterizes your business.
  • where the name you want is not available or distinctiveness is not relevant, a number name may be used, eg, 123456 Ontario Ltd. The government issues the next available number.
  •   

    DIRECTORS and SHAREHOLDERS

  • the shareholders are the owners of the company.
  • the directors operate and manage the company. They may and often are the same people as the shareholders.
  • outsiders and persons not active in the company usually will not be directors because of the liabilities.
  • company may have one or more directors.
  •   

    LIABILITIES OF DIRECTORS

    The law imposes on directors many of the liabilities that the owner would have had if the business had not been incorporated, eg:

  • environmental matters;
  • employee health and safety;
  • income tax,CPP and UIC withholdings;
  • GST;
  • Your bank will also make the primary shareholders guarantee bank loans.

     

    TRANSFER OF EXISTING BUSINESS TO COMPANY

    A transfer of assets of a business normally causes capital gains taxes, recapture of depreciation, income tax on the sale of inventory.

    s.85 of the Income Tax Act permits a tax free roll-over if that Act's requirements are strictly followed.

    The roll-over requires statements to be prepared by the business' accountant, agreement and transfer documents by the lawyer.

    The roll-over is usually done several months after the incorporation to permit the accountant to prepare the statements.

     

    ANNUAL REQUIREMENTS OF CORPORATION

  • Financial statements and corporate tax returns have to prepared annually by the accountant.
  • Annual minutes of directors and shareholders meetings approving the company's financial statements, electing directors, appointing officers and auditors or accountants are prepared by the lawyer.
  • An annual reporting statement has to be prepared and sent to the government.
  •   

    USUAL COSTS

    Incorporation:

  • legal fees: $1500
  • government filing fee $330 to $360
  • minute book, seal $150
  • search and reserve name $75
  • Roll-over Agreement: $350
  • Additional for particular assets, eg, real estate.
  • Annual Minutes: $200-350

    Accounting fees: billed by accountant in addition to above

     

    MULTIPLE WILLS AND ESTATE PLANNING - CORPORATE

    Many companies have increased in value, creating a problem on the death of the shareholder. If it is necessary to "prove" the will because of other assets such as real estate, investments, etc., then until now it has been necessary to include the value of the company shares in the probate value to calculate the estate administration tax (commonly called "probate fee") which has to be paid at the time of application for what is called a Certificate of Appointment of Estate Trustee. The probate fee is 1.5% of the value of the estate. This is usually just a nuisance tax, but if the value of the company shares is added in, can be quite high. On $500,000 worth of shares, the fee if $7,500, and increases proportionately with higher values.

    Recently the government has approved the idea of two wills, one just for the company shares, and one for all other assets. As a result, just the second will needs to be proved and probate fee paid on the value of assets in that will. The other will look after only the company shares, and does not need to be proven, saving the probate fee on the value of company shares.

    Both wills can have the same executors and beneficiaries.

    There is of course no guarantee that if the provincial government changes, the law won't be changed as well.

    Copyright © 2013. All Rights Reserved.