Is Your Internet Business Paying Too Much Taxes

An innovative law firm that tackles legal aspects of technology and internet businesses to optimize their commercial potential and profitability, while managing a highly demanding legal environment.

Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

As your Internet business grows, and becomes increasingly profitable, it is almost be inevitable that it will be subjected to further taxes. Nevertheless, as an Internet business grows and increases profitability, it also creates opportunities for legal business structuring and tax minimization that can allow you to retain that much more money from the success of your Internet business enterprise.

A. Optimize Business Structure:

Incorporation (Canadian-Controlled Private Corporation - CCPC): For most growing internet businesses, incorporating as a CCPC is highly recommended.
- Lower Tax Rates: CCPCs benefit from the small business deduction, significantly reducing the federal corporate income tax rate on the first $500,000 of active business income (which is typically 9% federally, plus provincial rates). This is generally much lower than personal income tax rates.
- Tax Deferral: Profits can be retained within the corporation and only taxed at your personal marginal rate when paid out to you as salary or dividends. This allows for significant tax deferral, providing more capital for reinvestment and growth.
- Lifetime Capital Gains Exemption (LCGE): Shares of a CCPC that meet certain conditions (Qualified Small Business Corporation shares) may be eligible for the LCGE upon sale, allowing you to realize a significant amount of capital gains tax-free (over $1 million as of 2024, indexed annually).
Sole Proprietorship vs. Partnership: While simpler to set up, these structures mean business income is taxed directly on your personal tax return at your marginal rate. This can be less tax-efficient as your business grows.
Holding Companies can provide a further layer of corporate structuring and tax planning, including:
- Asset Protection: A holding company can own the shares of your operating internet business. This can protect accumulated wealth and investments from potential liabilities of the operating business.
- Tax Deferral: Profits from the operating company can be paid as tax-free intercorporate dividends to the holding company. This allows you to accumulate wealth within the holding company at a low corporate tax rate, deferring personal tax until you personally withdraw the funds.
- Estate Planning & Succession: Facilitates transferring ownership and implementing an estate freeze, making succession planning more tax-efficient.
- Capital Gains Exemption (again): By moving non-active assets (like excess cash or investments) out of the operating company into a holding company, you can help ensure the operating company's shares continue to qualify as "Qualified Small Business Corporation Shares" for the LCGE.

B. Leverage Government Incentives - Scientific Research and Experimental Development (SR&ED) Program:

This is a major opportunity for many tech-focused internet businesses. If your business is involved in developing new or significantly improving existing products, processes, or materials that involve technological uncertainty and a systematic investigation, you could be eligible for substantial refundable tax credits. Examples for internet businesses include:
- Developing new algorithms for search, recommendations, or data analysis.
- Innovating in AI/Machine Learning for personalized experiences, automation, or fraud detection.
- Overcoming technical challenges in scaling web applications, integrating complex systems, or improving database performance.
- Developing novel cybersecurity solutions.
- Even seemingly "routine" development can have SR&ED components if it involves overcoming significant technical hurdles.

We understand how computer algoritms and technological processes intersect with the law and commercial aspects of the Internet, and working with corporate business officers, tech entrepreneurs and IT departments as they strive to realize upon the financial potential of the Net, AI and other computer-based technologies. For more information as to how our law firm can apply our knowledge of the law, technology and the Internet to your business pursuits, contact us via email at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

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