# Accountant makes mistake on incorporation time frame and costs me thousands of $



## samsoncan1 (Feb 7, 2015)

Hi Everyone:

I'm a resident of Ontario - I a self-employed and have a sole prop. business which is of course not incorporated. In 2014 I made well over 6 figure. Around 4 months into the year my accountant, said I needed to incorporate the business to reduce my taxation level from 40% (these numbers are off the top of my head) to 16% by incorporating the business. I asked him to help with it but said that there was a 1 year delay to incorporate i.e. if you want to declare taxes under an incorporation starting as of May 2014 you would have until may 2015 to incorporate and go back retroactively for the year. I excepted this until recently I was told by a friend this was not the case and if you want to start an incorporated company for small business tax breaks for may 2014 you would have to incorporate as of that date (may 2014) and you can not go retroactively. I confirmed this to be true my another accountant!!! 

What this basically means is that had he given me the proper advise, I would have paid from May to December 2014 16% on me earnings; however, I am now stuck paying 40% taxation. This was all discussed in person and I don't have any official records of it; however, clear logic would dictate knowing the difference in tax levels had I known I of course would have spent the 500 or so dollars in may incorporating to save myself what I fear is a 10,000-15,000 dollar difference.

Questions: 1) Is he liable for misinforming me? 2) if so, what should I do? can I or should I sue? Or try to get him to remedy with the government? What's the rules for a situation such as this? 3) Can I appeal to the CRA and explain? 

If I was the one who screwed up here I'd be more ready, but still painfully, to cough up the money, but seeing as I retain this accountant and pay them well to give me this advise and because of his mistakes I am now the one footing such a huge bill when I should not be, needless to say I am pretty upset and quite sure I am not the one who should have to lose so much money based upon the mistake of this accountant. Any advise would be greatly appreciated.


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## Davis (Nov 11, 2014)

It was the accountant who screwed up, not the CRA, so don't expect them to fix his mistake. Will he take responsibility for his error? You'll have to ask him. At very least, he should not charge you his fees for the year.

If he refuses to take responsibility, can you sue? You can try, but without documentation, your chances may not be good, and you could quickly spend $10,000-15,000 in legal costs on a case you may not win.

If it were me, I'd take the loss and fire the accountant.


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## OptsyEagle (Nov 29, 2009)

Can you win a law suit. No. Not enough documentation. Your word will be against his. Your logic scenario above will not be enough. There could be all kinds of reasons you decided not to incorporate.

Secondly, damages. The difference in tax rates you quote may not be entirely accurate. Your numbers above are referring to marginal tax rates, but to show damages you actually incurred, you would need to look at the actual tax amounts. If you earned $100,000 personally, your marginal tax rate will be in the 40% range but your average tax that you will actually pay will be around $27,000. This is due to the graduation of tax levels from $0 to $100,000.

Next, the only way you would get away with only paying 15% in corporate taxes, is if you never spend it. You would have to leave the remainder in retained earnings, inside the corporation. So my question to you is, do you have $100,000 in the bank or did you spend it? If you spent it or most of it, then with your corporation you would need to pay it out to yourself as either a salary or dividend. There would then be personal taxes owed on that, and by the time all was said and done, you would have handed over around $27,000, being incorporated, plus or minus a little.

Even if you did not need to spend it, we are only talking about tax "deferral" with the corporation, not tax "savings", since the money needs to come out some time.

So I think you are getting some bad tax advice from not only your accountant, but possibly also from your friends.


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## Just a Guy (Mar 27, 2012)

The one thing I've learned in business is, you never get to keep more money, you only get to decide who gets it. 

If you don't do anything (like incorporate) the money will go to the government. If you don't want it to go to the government, then you need to spend it on stuff like an accountant, tools related to your company, bank interest, etc. which are considered tax deductible...meaning you give it to others, but not the government. Either way, you don't get to keep the money, though you may find more personal benefit from the latter solution...


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## samsoncan1 (Feb 7, 2015)

OptsyEagle said:


> Can you win a law suit. No. Not enough documentation. Your word will be against his. Your logic scenario above will not be enough. There could be all kinds of reasons you decided not to incorporate.
> 
> Secondly, damages. The difference in tax rates you quote may not be entirely accurate. Your numbers above are referring to marginal tax rates, but to show damages you actually incurred, you would need to look at the actual tax amounts. If you earned $100,000 personally, your marginal tax rate will be in the 40% range but your average tax that you will actually pay will be around $27,000. This is due to the graduation of tax levels from $0 to $100,000.
> 
> ...



I have saved about 70,000 of the money earned last year and I was going to leave it in the company to avoid the taxes. The above makes me feel a lot better at least knowing that if I opt to spend the money I am likely to owe about the same amount either way - is this true? Can anyone else chime in that it works out to about the same unless you don't spend the money as a corporation? if so - it may not be worth it to go down a negative road with my accountant - he's proven to be quite good in the past and for a very fair price.


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## none (Jan 15, 2013)

samsoncan1 said:


> Can anyone else chime in that it works out to about the same unless you don't spend the money as a corporation? if so - it may not be worth it to go down a negative road with my accountant - he's proven to be quite good in the past and for a very fair price.


I find this statement absolutely hysterical considering the context.


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## Davis (Nov 11, 2014)

Yeah, whether it would save you tax to incorporate or not, you're telling us that he gave you incorrect information, and so prevented you from implementing your decision to incorporate. And now you want to keep him on? Well, it's your choice....


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## samsoncan1 (Feb 7, 2015)

No no, I am going to fire him, he's given me bad advice. I mean that it is not worth it to go down a negative road and sue him if the amount paid out would be comparable incorporated or not based upon what optsyeagle stated above. It's not worth the time and headache to go after this guy if it's a difference of 3,000-5,000 more or less vs what I originally believed would be a difference of 10k-15k. 

So to my original question - is what optsyeagle stated above accurate for Ontario?


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## tenoclock (Jan 23, 2015)

By incorporating, you are not exactly 'saving' the 24%, you are merely deferring it. And if you did not have money in the bank (i.e. you spent all your profit), then you can not even defer paying the 24%.

Regardless, you should incorporate as soon as possible given the level of your income and the tax planning opportunities that arise with it.


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## MoreMiles (Apr 20, 2011)

You should think of a corporation as 'personal RRSP' you get to pay less tax for now. But when you take the money out, you still need to pay it at that time. Don't feel too bad. Also, one year of incorporation delay is nothing when you consider your business may run for decades until you retire.


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## Cal (Jun 17, 2009)

^ agreed with moremiles.

If you sue, the accountant would simply argue that you misunderstood, that you had to incorporate, then you could defer until the end of the fiscal year.

If you want to more forward with another accountant, then do it, but lose the anger over it. Put the energy into your business.

In the big scheme of things what a couple of months at a higher taxation rate. There will be other financial glitches over the course of your career as well.

Onwards and upwards.


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## dotnet_nerd (Jul 1, 2009)

I can chime in. I'm a bit late to the party though, it's all been covered.

I'm in the same situation, I started as a software developer (hence my userid) in the late 90's and decided to incorporate. I save taxes, not because the small corporation tax rate is less - it is , but because of the enormous flexibility. My wife holds an equal number of the same class of shares, so we can income split. 

Also, I have the choice of
a)-leaving some cash in the business as retained earnings during really good years
b)-take money out as dividends
c)-take money out as director's fees
(choosing b vs c is a whole topic in itself - there's source deduction issues, and RRSP contribution room to think about)

Also, if you choose a fiscal yearend after July you can use a deferral strategy; pay a director's fee, but you have 180 days to physically pay it, so this puts the personal income into the next calendar year.

Accounting is more expensive as a corp, but I now do my own bookkeepping and my own corporate tax return


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