INCORPORATING
by Bill Stemp

When you incorporate in Alberta, you are able to limit your liability to creditors. What this means is you will not be personally responsible for the debts of the corporation because the corporation is deemed by law to be a separate legal entity. You will only be responsible for corporate debts if you sign a personal guarantee for instance with a bank. This is very important for you to understand.

When you incorporate you must have at least one shareholder and one director. The directors of a company are the people who are responsible for the corporation’s activities. The directors hire or appoint the officers who in a small corporation are usually the same people. The shareholders elect the directors annually.

The corporations that we set up have 6 classes of shares, one class of voting common shares, 4 classes of nonvoting common shares and one class of preferred shares. We do this so that you can have investors in your corporation who would not necessarily want or need to have any say as to who the directors of the company would be but they would like to have dividends paid to them for their investment. By having different classes of nonvoting shares, you can have different dividend rates paid to these shareholders. For example, one class of nonvoting shares could have a fixed dividend rate of 4% per year while another class could have a fixed dividend rate of 6% per year.

Further, the directors can decide if the dividends are to be paid every year or only if the corporation has sufficient profit to declare a dividend. The directors also can determine the dividend rate to be paid each year. This gives the directors much more flexibility to handle the corporation’s affairs.

By incorporating you are able to have a health benefit trust set up where your personal medical expenses can be reimbursed to you by the corporation without this being deemed to be taxable to you as the employee. Further, the corporation is entitled to write off these expenses from its taxable income. So you as the shareholder/employee do not pay tax on the money reimbursed to you by the corporation and the corporation is entitled to write off this cost. This can be a very big benefit to you.

If your Corporation qualifies as what is known as a Canadian Controlled Private Corporation, which usually applies to anyone with active business income, the applicable corporate income tax rate is 9% Federal and 2% for Alberta. However please note that for inactive business income which includes investment income i.e., interest, the rate is 38% Federal and 8% Alberta.

Thus in most cases you will be paying a total of 11% Federal and Provincial for corporate income tax which is substantially less than what you would be paying as an unincorporated business.

The cost to incorporate is $1,200 plus GST plus disbursement costs of approximately $475. These fees includes a name search, incorporating, minute book, share certificates and minutes/resolutions to set up the directors/shareholders.

Stemp & Company
1670, 734 – 7th Avenue SW
Calgary, Alberta T2P 3P8
Bill Stemp
403-777-1125 bill@stemp.com