Incorporating a tree service: liability, equipment and the right structure

When a tree service should incorporate

Incorporate when the business earns more than you need to live on, when you are about to finance a major truck, or when a second owner is coming in — whichever comes first. The small business deduction lets profit left in the corporation be taxed at the low corporate rate, which is what funds the next chipper; a sole proprietor buys equipment with after-tax personal dollars. The liability case gets the headlines, but the equipment-funding case is the one that shows up every year. Our answer on whether to incorporate in Ontario covers the general test; below is what changes for tree work.

If you already own trucks and equipment personally, they move into the corporation under a section 85 rollover at elected amounts so the transfer itself triggers no tax, and a GST44 election keeps HST off the transfer of the business assets. Do this before the next big purchase, not after, so the loan, the title and the insurance are in the corporation's name from day one.

What the corporation protects, and what it does not

A corporation separates business obligations — the truck loan, the supplier accounts, the municipal contract — from your house. It does not protect you from your own negligence on a job site, and directors remain personally liable for unremitted source deductions and HST. Lenders will also ask for a personal guarantee on equipment financing for a young corporation, so the loan follows you anyway for a while.

That is why insurance carries more of the load in this trade than the corporate veil does: commercial general liability sized for property damage, coverage that actually names tree work and working at height, automobile coverage on every unit, and certificates from every crane company and subcontractor you bring on site. Incorporation is the frame; insurance is the load-bearing wall.

One corporation or two: the equipment company

Once the fleet is worth real money, many owners separate it: an operating company employs the crews and signs the contracts, and a second corporation owns the bucket trucks and chippers and rents them to the operating company. If a claim ever exceeds insurance, the equipment is not sitting inside the defendant.

The second structure earns its cost when the fleet is substantial and the claims risk is real; it is overkill for a one-crew company. Our holding-company answer covers the broader case for a holdco above the operating company, which can also move surplus cash out of the operating company's reach.

WSIB, shareholders and the details that trip new corporations

• WSIB for you: as an executive officer of a corporation you are not covered automatically. If you climb or run the bucket, apply for optional insurance and declare realistic earnings; your workers must be registered regardless.
• Two-climber start-ups: a shareholders' agreement with a buy-sell clause is not optional in a trade where one partner can be injured for a season. Decide now how shares are valued and paid for if one of you cannot work.
• Fiscal year-end: pick one in the slow season so the first year-end does not land during storm cleanup.
• Names and permits: the corporate name goes on municipal tree-permit applications, tender submissions and WSIB clearance certificates; a business name registration covers the trade name the trucks already carry.
• Minute book and annual return: both are separate from the tax return and both are required; lenders and municipal procurement departments ask for the minute book more often than owners expect.

Paying yourself from the new corporation

Salary gives RRSP room and a declared earnings figure for WSIB optional insurance; dividends avoid CPP but leave both of those empty. Most owner-operators in this trade land on a base salary with dividends on top in good years. A spouse who runs dispatch, estimates or invoicing can be paid a reasonable salary for that work, which is defensible in a way that a dividend to a non-working shareholder may not be under the split-income rules.

If the corporation will buy equipment in the US or bid on US storm work, the entity's documentation matters more; our cross-border tax page for tree services sets that out. Our incorporation and compliance services page explains the filings we handle after the articles are signed.

Source: CRA — Form GST44, Election Concerning the Acquisition of a Business.