If you’re a self-employed individual in Calgary—whether you’re a freelancer, contractor, or small business owner—there’s a good chance you’ve wondered if incorporating your business is the right move. Incorporating comes with perks like tax advantages, credibility, and liability protection, but it’s not always the best option for everyone.
For those looking to secure a mortgage, incorporation can complicate things if you’re not careful. Lenders often scrutinize your financials more closely when you’re incorporated, so it’s important to weigh the pros and cons before making the leap.
Let’s explore when, why, and how to incorporate your business, plus the potential impact on securing a mortgage in Calgary.
When Should You Consider Incorporating?
The timing for incorporation depends on several factors. While it’s not a one-size-fits-all decision, here are some scenarios when incorporating your business might make sense:
- Your Income Is Growing: If your business generates more income than you need to cover personal expenses, incorporating allows you to retain some of that income in the corporation, deferring taxes until later.
- You Want Liability Protection: Incorporation creates a legal separation between you and your business. This means your personal assets are protected if the business runs into financial or legal trouble.
- You’re Hiring Employees or Expanding: If your business is growing or you’re taking on employees, incorporation can provide structure and protection as you scale.
- You’re Looking to Build Credibility: Incorporated businesses often appear more professional and established, which can attract bigger clients and investors.
- You Need a Tax Advantage: Corporations in Alberta are taxed at a lower rate than personal income, particularly if you qualify for the Small Business Deduction (currently 8% federally and 2% provincially).
Why Incorporate? The Benefits for Self-Employed Individuals
1. Tax Savings
One of the most compelling reasons to incorporate is the potential for tax savings. When you’re self-employed, your income is taxed at your personal rate, which can be as high as 48% in Alberta for top earners.
By incorporating, you can take advantage of the lower small business tax rate on the first $500,000 of active business income. This allows you to leave some income in the corporation, deferring taxes until you withdraw the money later, usually at a lower personal rate.
2. Limited Liability
As a sole proprietor, you’re personally responsible for your business’s debts and obligations. Incorporating separates your personal and business finances, protecting your personal assets (like your home or car) if the business faces financial challenges.
3. Professional Image
Incorporation can boost your credibility. Many larger clients and organizations prefer working with incorporated businesses because it demonstrates stability and professionalism.
4. Succession and Estate Planning
Incorporating makes it easier to transfer ownership of your business. Whether you plan to sell, bring on a partner, or pass it down to family, a corporation provides a clear structure for succession planning.
5. Access to Capital
Incorporated businesses often have an easier time securing financing or investment since they can issue shares or demonstrate financial separation from personal finances.
The Mortgage Question: How Incorporating Affects Home Loans
For self-employed individuals in Calgary, incorporation can complicate the process of getting a mortgage. Why? Lenders look for stable, easily verifiable income, and when you’re incorporated, your income may appear lower on paper due to tax planning strategies.
Here’s what to watch for:
- Lower Taxable Income Can Backfire: Many incorporated business owners pay themselves a smaller salary and leave the rest in the corporation to save on taxes. While this strategy works for reducing taxes, lenders may see your lower salary and assume you can’t afford the mortgage.
- More Paperwork Required: If you’re incorporated, lenders may ask for additional documents, including corporate financial statements, your T4 slips, Notice of Assessments (NOAs), and proof of retained earnings.
- Stated Income Mortgages May Be Needed: If your taxable income is too low, you may need to opt for a stated income mortgage, which allows you to estimate your earnings based on bank deposits and financial history.
Pro Tip: When planning to buy a home, it’s often a good idea to work with a mortgage broker who specializes in self-employed clients. They can help you present your financials in the best possible light and connect you with lenders who understand the challenges of self-employment.
How to Incorporate Your Business
Incorporating is a straightforward process, but it does require careful planning to ensure everything is set up correctly.
Steps to Incorporate in Alberta:
- Choose a Name: Decide on a unique name for your corporation or opt for a numbered corporation. Your name must comply with Alberta’s corporate naming rules.
- Register Your Business: File your incorporation documents with Alberta Registries. You’ll need to prepare and submit:
- Articles of Incorporation
- Notice of Address
- Notice of Directors
- Get a Business Number (BN): Once your corporation is registered, you’ll receive a business number from the CRA for tax purposes.
- Open a Corporate Bank Account: To separate your personal and business finances, set up a corporate bank account for all business transactions.
- Set Up Corporate Tax Accounts: Register for GST/HST, payroll deductions, and other accounts as needed.
- Consult a Professional: Incorporating comes with ongoing responsibilities, like filing annual returns and corporate taxes. It’s a good idea to work with a lawyer and accountant to ensure everything is done correctly.
Key Takeaways
Incorporating your business can offer significant benefits, from tax savings to liability protection. However, it’s not the right move for everyone. If you’re a self-employed Calgarian looking to secure a mortgage, it’s especially important to plan carefully—incorporating could make it harder to prove your income, but working with the right professionals can help you navigate this challenge.
If you’re considering incorporation or need help securing a mortgage as a self-employed individual, contact us today. We’ll guide you through the process and make sure you’re set up for financial success.
