Anyone know what is involved with setting up a ltd company (or local equivilent) in Canada.

In Ontario you can have a numbered company set up for about $800. It's less if you're willing to trudge to the Ministry of Consumer Affairs yourself. Grand and Toy sell a kit with all the forms, the minute book and the seal. If you want the company to have a name it can get expensive as you have to pay for searches until a unique name is found but, for most purposes, a numbered one will do.

Hi There

I recently set up an incorporated company on line.
The following link provided me with all the information I required.
http://strategis.ic.gc.ca/epic/inter..._cs01914e.html
Cost of incoporation = $200 cad
company name search $20 I think
The link also deals with various types of company formations.
Good luck and happy reading

Here are a few points to add to what other posters have said:

1. It is critical to issue different classes of shares to different people. For example, if a husband, wife and children are share holders, one of them should have Class A shares, another should have Class B shares, still another should have Class C shares, and so on. This enables you to pay Dividend X to holders of Class A shares, Dividend Y to holders of Class B shares, and Dividend Z to holders of Class C shares.

We have a corporation that originally was created as a vehicle for my husband's consulting work. He has Class A shares, I have Class B shares, and our kids have Class C and D shares respectively. When I was working as an employee for another company, our family-owned corporation used to pay me a dividend that was just small enough that, when it was combined with my salary, it did not push me into the next income tax bracket. We would not have had the ability to tweak my dividend if my shares had been the same as my husband's and kids.

2. Something you have to be careful about is that, if your corporation is a vehicle for your consulting work, you have to have more than one client in any given tax year. If you have only one client, the government will deem you to be a de facto employee of your client, and will tax you as if you are an employee of that client. So, if you have a major client, you need to pick up a little bit of work on the side, just to prove that you have more than one client.

3. Is incorporation the best way to go? If you are setting up a corporation to act as a vehicle for your consulting work, perhaps it would be better to conduct your work as a sole proprietor. If you do your consulting work through a corporation, the corporation will have to pay corporate income tax (albeit the tax rate for small businesses is a low one). Then you and your family members who will be drawing dividends, consulting fees or salaries from the corporation will have to pay personal income taxes on top of the income tax that the corporation already has paid. Admittedly you can spread the earnings around, and ensure that all of you stay in low tax brackets. But it's not worth jumping through all those hoops if the consulting work is bringing in only C$40,000 a year. I'm sure you'd make much more than that. I used the figure just for illustration purposes.

4. If I were you, I would do most of the legwork myself, but I would run my plan by an accountant before I actually registered my corporation. An accountant can save you from making costly mistakes.

Hope that helps.

2. Something you have to be careful about is that, if your corporation is a vehicle for your consulting work, you have to have more than one client in any given tax year. If you have only one client, the government will deem you to be a de facto employee of your client, and will tax you as if you are an employee of that client. So, if you have a major client, you need to pick up a little bit of work on the side, just to prove that you have more than one client.

Excellent post Judy,
A warning to anyone from the UK considering working "On Contract" either through Canadian versions of Limited or 'Umbrella' Companies.
God bless IR35 !!!!

I'm a pimp. That is, I provide technical consulting services using subcontractors. We require that everyone we deal with be incorporated but it's not particularly for tax reasons. The advantage to us is that employment legislation doesn't apply to corporations. Thus, if we have a client that wants only bodies of a specific ethnicity or gender we can do that, we can also fire people at will and don't have to bother with benefits. We pay n dollars per billable hour and that's all.

Contracts go long here, I've had the same one since 1986, and often the job will be the contractor's only source of income. There is a theoretical risk of being declared an employee but, unlike the UK, it's not common. Our receptionist, for example, has been with us for more than a decade as a subcontractor and has had no bother with the taxman.

If the company has paid consulting fees and salaries, it won't be paying corporation tax on its revenue behind that money because they are deductible expenses. If the company has paid out dividends then they are received by individuals with a tax credit to offset the double-tax effect (I believe this was a recent change in the system - the finance minister of the outgoing federal Government wrote to me telling me this was being put in place).

A limited company has further advantages when it comes to limited liability if the company should fail. As in the UK, the disadvantage is more administrative complexity.

K.

The small business rate applies only to income from business "carried on in Canada" which is not a "personal service". For taxation purposes, consulting is considered a personal service, UNLESS you employ at least five people that are NOT related to the business owner(s).

Edit: There are other factors also; one of which is an income limit. I believe this is now $400k per annum.

Yikes, Calgal, my heart skipped a beat when I read this. If it was true, and if I understood it correctly, our corporation did not qualify for the small business tax rate. Yet I was mystified by the fact that our accountant had never raised the issue.

After fossicking around Canada Revenue Agency's website, I think I've found out why our corporation does qualify for the small business rate after all. On this page CRA states that the limitation you've mentioned is applicable when the services are performed for a person or a partnership. It goes on to say [emphasis mine]:

My husband's and my clients are corporations, so perhaps that explains our corporation's eligibility for the small business deduction.

Hi Judy - apologies for causing you any grief; but so did mine when I learned that our so -called 'cross border tax specialist', had no idea (and hence failed to inform us) that:

a) Our company, and we (as individuals) should be filing a US tax return (this doesn't mean paying 'more' tax as there is a treaty between the US and Canada - it's merely a formality to prove exemption).

b) That we were not quaified for the small business tax rate, even though we have been receiving it for a number of years!!!

c) That 95% of Canadians doing cross border 'business' are mis-informed of their obligations regarding taxes related to income earned outside of Canada; and that there are less than a handful of 'experts' across the Country truly 'qualified' to deal with such (incidentally none of them reside in Alberta)!!

d) That there is no statute of limitations in this instance.

As a result, we potentially face some pretty heavy penalties of about $70k US alone. We are quite meticuous about keeping the powers that be happy - any 'saving' just isn't worth the aggro; at least not to us. We would rather pay too much tax and be 'clean' than have them knocking on our door down the road!

Some people can live with looking over their shoulder - we can't. I like to know that everything is above board, so I can sleep soundly at night. Needless to say, our 'expert' didn't receive his fee for this last tax year! Interestingly enough, he isn't chasing it, and tells us he has insurance "for that kind of thing" (our fines)!

We believed we did the 'right thing' by hiring an expert to deal with such complex matters; but as my hubby said; "We don't know what he doesn't know"; at the end of the day, if it's wrong - guess who's on the hook?! Not the 'expert' one hired, that's for sure!

Many thanks, Calgal, for the extra information.

I'm very sorry to hear about the grief you've experienced.

If I can impose on you for one more bit of clarification, are you saying that you're now in this situation, i.e., not eligible for the small business deduction, because (or at least party because) your corporation provides services outside of Canada?

No, it doesn't. An associated company is a special type of company (essentially one that is part of a group, e.g. a holding company).

The get-out clause you need is higher up:

"..the incorporated employee would, if it were not for the existence of the corporation, reasonably be considered an officer or employee of the entity receiving the services."

This is similar to the IR35 test in the UK: "it is disguised employment?" I imagine the tests are somewhat similar: do you carry business cards for the customer, are you personally named in the contract or can you send anyone to do the work, are you under supervision of the customer or do you decide your day-to-day duties in order to meet the contract, do you have specialist tools or do you use your customer's, do you work on-site or from your own premises, etc.

K.

Thanks for the info.

In a word; yes. But I am still looking into it. We are more concerned with the US side of things at the moment, as they are actively seeking non-filers; the IRS and INS having been instructed to 'talk' to each other.