Congratulations on your new professional corporation!
This new entity will provide you with many benefits and be a valuable savings tool as you plan for the future. But overall, what does it change?
Here are several key areas you need to be aware of.
Do I need a new bank account and credit card?
Yes, when you incorporate, your business is now separate from you. The money, other assets, liabilities, and income all belong to the corporation, and not to you personally. This means that separate bank accounts and credit cards are required, and anything you want to take out of the company needs to be documented.
If the money in the corporation belongs to the business, how do I get paid?
There are two ways that you can get paid by your corporation:
1) Salary This is key to your financial plan. Without a salary, you cannot build RRSP room, have a health spending account, etc. Historically, professionals shied away from wages because they require CPP and tax remittances to the CRA every month. With new technology, we can automate this process for you, making it easier and more efficient. These are also deductible.
2) Dividends These are a simple way to top up your income. Dividends come out of after-tax earnings, are not deductible to your corporation, and do not require CRA remittances. They also do not help grow your RRSP contribution room, so only using them as your source of income can hinder other areas critical to your financial success.
I do some driving for work, should my corporation own my vehicle?
If you are not using the vehicle for business 90%+ of the time, then no. It can, however, reimburse you for the use of your personal vehicle. The CRA provides guidelines on acceptable per-kilometer rates that can be reimbursed tax-free. There are also applications that can track your kilometers automatically for you. This means all gas, maintenance, and vehicle insurance should be paid for personally, and not through the company.
What do I need to report to the CRA?
Now that you have incorporated, you not only need to report your personal income to the CRA, but also the corporation’s income. This is done on a corporate tax return (T2). This differs from your sole proprietorship, in that you now have to report your assets and liabilities, in addition to your income, to the CRA. On top of that, you may have other necessary filings including a T4 which reports wages paid (using the technology alluded to above, this could be filed automatically) and a T5, which reports dividends taken.
What will change with my bookkeeping?
Your bookkeeping as a sole proprietor focused on making sure that revenues and expenses were recorded correctly and did not put as much emphasis on the assets and liabilities, whereas your corporation now needs to reconcile these items regularly to ensure they are accurately being reported as well.
Is there anything else I should do to utilize my corporation efficiently?
Here are a couple of key things you should do:
1) Non-registered investments If you have funds building up in your corporation, you can look at investing those in non-registered investments such as a building for your practice, etc.
2) Update your term life insurance Change both the ownership and beneficiary of your life insurance to be your corporation. This way you use corporate funds in the corporation to pay for the insurance instead of paying personal tax on funds withdrawn to pay for the same thing. Your beneficiaries will still get access to the tax-free funds personally with a simple CRA filing.
3) Start a health spending account This account allows you to run all of your personal health expenses through the company and it gets deducted as a legitimate expense. This could include things like prescriptions, chiropractic, or even laser eye surgery. Remember, as I mentioned above, salary is required for you to have this feature, so the salary would come first.
4) Golf memberships Do you use your golf membership to help build your practice? This can be a stingy area with the CRA, but if you are building clientele through golfing, it may make sense to have your corporation pay for it.
5) Individual pension plan Depending on your priorities, an Individual Pension Plan could benefit you and your retirement goals.
Setting yourself up with proper accounts and practices ahead of time can make your transition much, much simpler, so if you have any questions about this article or incorporation, please contact our Health Care Professionals expert, Brett Ficiur.
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