Should I Incorporate My Fishing Business?
Evaluate the reasons why you’re thinking about incorporating:
Am I making more income then I need and want to save or defer additional income tax?
Incorporation can help you realize savings as the average combined personal income tax rate for income of $50,000 is 20.15% and increases after it. However, net taxable income is taxed at 11%* in a corporation in Prince Edward Island. This tax rate is applicable up to $500,000 of net taxable income per year.
Am I prepared to accumulate a portion of my after-tax earnings in my new corporation?
If you rely on every dollar made from your fishing business to meet the cashflow needs of your household, then you should not incorporate. There would be no tax savings due to the integration of the personal income tax and corporate income tax systems.
When preparing the analysis for cash needs, certain cash expenditures, that are not personal may be transferred to the corporation, such as loan payments and tax costs.
If your current earnings allow you to accumulate excess cash in a corporation that can be saved for your retirement, then it is important to note that this cash can be invested within the corporation up to certain prescribed thresholds.
* Subject to certain conditions
What is a corporation and how does it work?
A corporation is a separate legal entity and is recognized as such by CRA. Therefore, your fishing assets will be owned by the corporation.
Since it is legally a separate entity, it can earn income on and pay for expenses related to the fishing assets it owns. That is why it will be required to file a separate tax return with the Canada Revenue Agency (CRA) each year.
You will control your corporation as you will be the only person who owns shares. The Department of Fisheries and Oceans (DFO) requires the person transferring the license to have full control of the corporation.
Your corporation will have a separate name, separate bank account, separate loans and liabilities and all landings and expenses for fishing will be in its name. It is important upon incorporation to notify your buyers and vendors so that relevant accounts and records can be updated and transactions recorded in the company’s name.
Cash you receive from your corporation in any form including dividends, wages, crew shares or a combination of them will be included in your personal income and you will be taxed on it accordingly. The corporation will be able to claim wages and crew share paid to you as an expense.
Advantages of incorporation:
• Limited Liability – your personal assets are protected (to a certain degree) from claims by creditors, lawsuits, or other liabilities arising in the corporation.
• Access to Small Business Deduction - allows you to access the 11% corporate income tax rate in the 2021 year up to net taxable earnings of $500,000 per year. See example.
• Deferral of Tax - the corporation will pay income tax at 11%. You will not be required to pay personal income tax on income earned by the corporation until you take cash out of the company.
• You can still income split with family members provided that they are paid a “reasonable” wage or receive a crew share.
• You still have access to the lifetime capital gains exemption on the sale of your fishing corporation shares as they are considered to be qualified fishing property, provided your fishing corporation does not own too many non-fishing assets.
• There is a tax election that can be utilized to reduce the amount of recapture (personal income) on the transfer of your fishing assets to your fishing corporation.
• The deferral of tax and lower tax rate results in significantly more cash after tax (if left in the corporation)
What types of assets should my corporation own?
Since your corporation will be reporting the majority of taxable income incurred during the fishing season, you want to ensure that it can claim the maximum amount of fishing expenses and deductions. One of your largest deductions will be capital cost allowance (the tax term for depreciation), which is directly attributable to the fishing property that your corporation owns.
Therefore, you want to consider transferring the following assets into your corporation:
• Fishing license(s)
• Fishing vessel(s)
• Fishing Gear
• Other miscellaneous, but necessary equipment
• Motor Vehicle if used 90% or more in fishing
• Boat Buildings
• Workshops not attached or encroaching on your principal residence
• Bait Sheds (if owned by you and not leased)
• Land that is used principally for fishing – land occupied by boat pad, bait shed, or workshop
What are the costs of incorporation?
You will incur legal and accounting fees required to incorporate your fishing business and to transfer your fishing assets into the corporation. Accounting fees vary on a case by case basis.
You will incur additional annual accounting fees as you are required to file a corporate tax return each year in addition to your personal income tax return.
MRSB opened its doors more than 40 years ago as a small accounting practice. Our goal is to provide exemplary service to businesses and individuals on Prince Edward Island, helping them to achieve their short-term and future financial goals.
We've now grown to a team of over 55 advisors and five professional divisions, with offices in Charlottetown, Summerside, O'Leary and Souris. Our primary goal is much the same as it was when we started: to provide value beyond financial statements and basic business planning, partnering with you at every stage of your growth to achieve exceptional results.