Incorporate or stay a sole proprietor?

As a sole proprietor, your business profit is simply your income — it lands on your personal return and is taxed at your personal marginal rate, and you pay both halves of CPP on it yourself. It's the default, it's free to start, and it's genuinely the right answer for most people starting out. See what that costs you with the self-employment tax calculator.

A corporation is a separate legal person that earns the income, pays corporate tax on it, and then pays you — as salary, dividends, or both. The headline attraction is the small business deduction: active business income up to $500,000 a year is taxed at a low combined rate, far below top personal rates. But that low rate is not a discount you get to keep. It applies only while the money stays inside the company. The moment you pay yourself, personal tax applies on top, and the combined total lands close to what you'd have paid as a sole proprietor. That principle has a name — integration — and it's why incorporating to 'pay less tax' misleads people.

So the real benefit is deferral, not avoidance, and it only exists if you can leave profit in the company. If your business earns $200,000 and you need all $200,000 to live on, incorporating buys you very little. If it earns $200,000 and you live on $90,000, the remaining $110,000 stays taxed at the low corporate rate and keeps compounding — that's a meaningful, repeatable advantage. The rough rule of thumb is that incorporation starts paying when profits consistently exceed what you draw out.

Set that against the running costs. A corporation needs its own T2 return, separate books, and usually an accountant — commonly a few thousand dollars a year — plus incorporation fees and annual filings. There are real non-tax upsides too: limited liability separates business debts from your personal assets, and some clients simply prefer contracting with a corporation. And there's a flexibility perk worth knowing — a corporation can pay dividends instead of salary, which avoids CPP contributions, though that also means building no CPP entitlement. Compare what each path does to your personal bill with the income tax calculator.

Two cautions before you decide. If you work mainly for one client and look like an employee, the personal services business rules can strip the small business deduction and tax the income punitively — the CRA's incorporated-employee test is unforgiving. And either way, once you owe enough tax that isn't withheld at source, the CRA expects quarterly instalments; check yours with the CRA instalment calculator. This is one of the few decisions genuinely worth an hour with an accountant — the right answer turns on your numbers, your province and your plans.