Corporations can range from one private shareholder to millions of public shareholders. In either instance, the concept is the same, a share represents ownership in the underlying corporation. As an owner, you are entitled to a proportionate share of the corporation’s value. This value can be derived through the payment of dividends from accumulated after tax income inside of the corporation or through the sale of the share to another individual.

Dividends paid to shareholders represent monies available after the imposition of corporate taxes. As such, recipients of dividends (from Canadian companies) receive a dividend tax credit on their personal tax return in order to compensate the shareholder for these taxes already paid by the corporation. The amount of dividend depends on whether the income was taxed under the general corporate tax rate (eligible dividends) or under the small business rate (other than eligible dividends).

Canadian controlled corporations (those with net taxable income under $500,000) are eligible for a reduced tax rate on those earnings. Due to varying provincial tax rates, this reduced tax rate will be anywhere between 12.5% to 15%. This lower rate is intended to provide small businesses with additional monies to reinvest in the capital assets required to continue to grow the company.

As a Chartered Professional Accountant, Donovan works with each corporation to maintain compliance with all required filings while also working with the business owner to minimize the taxable impact of current and future distributions from the corporation.

Partnerships typically take on two forms: general and limited. Unlike corporations, a partnership is taxed at the partner level on their personal tax return. This means that rather than the partnership paying tax, the individuals partners are taxed on their personal tax return at their marginal tax rate. This is typically an unfavorable result as there is little room to determine the timing of income and expenses.

A general partnership follows the traditional structure where two or more persons join together in a business venture. Each partner will typically have contributed assets or services in order to form the partnership (though sometimes not equally). Due to the inherent trust required to operate effectively as a partnership, this form of partnership has fallen out of favour over the years. That being said, this business structure still has merits and can result in relatively low compliance costs.

A limited partnership limits the limited partner’s exposure to losses to the extent of their investment in the partnership (similar to that of an investment in a corporation). This is a sizable benefit from a general partnership as it minimizes the potential downside risk of owning partnership shares. These partnerships typically have a higher compliance costs associated with them due to the annual filings required and complicated recordkeeping.