The key decision for self-employed Canadians earning $75,000–$100,000+: should you incorporate? The small business corporate tax rate of 12–15% is dramatically lower than personal rates of 30–53%, but the real benefit comes from tax deferral — leaving money in the corporation to invest and compound at the lower rate. Below $75K in net income, the extra $3,000–$5,000/year in accounting and maintenance costs often eats up the savings.
Quick Comparison Factor Sole Proprietor Incorporated Setup cost $0-$100 $1,000-$3,000 Annual cost $500-$1,500 $2,000-$5,000+ Tax rate Personal rates 12-15% (small business) Liability Unlimited personal Limited to corporation Complexity Simple Complex Best for income Under $75K Over $100K+
Tax Comparison Personal Tax Rates (Combined Federal + Provincial) Taxable Income Ontario BC Alberta $50,000 ~25% ~23% ~25% $100,000 ~35% ~32% ~31% $150,000 ~43% ~39% ~38% $200,000+ ~53% ~53% ~48%
Corporate Tax Rates Income Type Federal Provincial Combined Small business (first $500K) 9% 3-4% 12-15% General rate (over $500K) 15% 8-12% 23-27%
Tax Savings Example Scenario Net Income Sole Prop Tax Corp Tax (left in corp) Self-employed $100,000 ~$28,000 ~$12,500 Self-employed $150,000 ~$53,000 ~$19,500 Self-employed $200,000 ~$82,000 ~$26,500
Catch: When you pay yourself from the corporation, you pay personal tax again.
How Corporate Tax Deferral Works The Tax Integration System Step Tax Event 1. Corp earns income 12-15% corporate tax 2. Money stays in corp No additional tax 3. Pay yourself salary Salary deducted from corp, taxed personally 4. Pay yourself dividends Dividend taxed personally (with credit)
Deferral vs Savings Strategy Tax Outcome Leave money in corp Tax deferred (12-15% now, more later) Pay out everything Roughly same as sole prop (integrated) Some in corp, some salary Optimize each year
Integration means : Total tax on income paid out is designed to equal personal rates. But deferral is valuable.
When to Incorporate Consider Incorporating If… Factor Threshold Net income $75,000-$100,000+ Leave money in business Yes (don’t need it all) Liability risk Medium to high Business loan needed Often required Plan to sell business Easier as corporation Multiple owners Cleaner structure
Stay Sole Proprietor If… Factor Situation Net income Under $75,000 Withdraw all income Need it all personally Simple business Low complexity Low liability Service business Short-term/side gig Not worth setup
Cost Comparison (Annual) Sole Proprietor Costs Expense Cost Business registration $0-$60 Accounting (tax prep) $300-$1,000 Bookkeeping $0-$1,200 HST filings $0-$500 Total $300-$2,760
Incorporated Costs Expense Cost Incorporation (one-time) $1,000-$3,000 Corporate tax return (T2) $1,000-$3,000 Personal tax return $200-$800 Bookkeeping $1,200-$3,600 Year-end financials $500-$2,000 Annual corporate filings $20-$50 Registered agent (if needed) $150-$300 Annual total $3,000-$10,000
Break-Even Point Factor Calculation Extra cost for corp ~$3,000/year Tax deferral rate ~20% (difference in rates) Break-even income ~$15,000 (where deferral covers costs)
But incorporation makes more sense at higher incomes for meaningful deferral.
Liability Protection Sole Proprietor Risk Protection Business debts Personal liability Lawsuits Personal assets at risk Client claims Personal exposure
Incorporated Risk Protection Business debts Limited to corporate assets* Lawsuits Personal assets protected* Personal guarantees Still personally liable
*Directors can still be personally liable for certain obligations (payroll, HST, etc.)
When Liability Matters Business Type Liability Risk Consultant/freelancer Low-medium Contractor (construction) High Product-based Medium-high Healthcare services High Software/tech Low-medium
Paying Yourself: Salary vs Dividends Salary Pros Cons RRSP contribution room Payroll costs (CPP) EI benefits (if opted in)More administration Predictable income Corp tax on profit Tax-deductible to corp Taxed immediately
Dividends Pros Cons No CPP contributions No RRSP room generated Simpler administration Not deductible to corp Flexible timing Integration not perfect Lower personal tax rate No EI benefits
Optimal Mix Situation Strategy Want RRSP room Salary up to needed room Want to minimize CPP Mostly dividends Need EI benefits Enough salary to qualify Typical approach Salary up to $60K-$80K, rest dividends
Business Structures Compared Federal vs Provincial Incorporation Factor Federal Provincial Name protection Canada-wide Province only Operating area All provinces Home province (+registration elsewhere) Annual filings Federal + provincial Provincial only Cost Higher Lower Complexity More Less
Types of Corporations Type Best For Provincial corporation Operating in one province Federal corporation Multi-provincial operation Professional corporation Doctors, lawyers, accountants Holding company Asset protection, income splitting
Income Splitting Opportunities Paying Family Members Strategy Rule Salary to spouse Only if they do actual work Dividends to spouse TOSI rules limit this Hiring children Reasonable for work done
Tax on Split Income (TOSI) Situation TOSI Applies? Spouse not working in business Yes (taxed at top rate) Spouse significantly involved No Adult children not working Yes Adult children working No
TOSI rules (since 2018) significantly limit income splitting.
When to Incorporate Checklist Question If Yes → Incorporate Earning $100,000+? Strong reason to Can leave $25K+ in corp annually? Major tax deferral Liability concerns? Legal protection Planning to sell business? Better exit options Need business financing? Often required Multiple business owners? Cleaner structure
How to Incorporate Steps Step Action Cost 1 Choose name (NUANS search) $50-$100 2 File articles of incorporation $200-$500 3 Create corporate documents Inc. in step 2 or $500+ 4 Get business number (CRA) Free 5 Open corporate bank account Free 6 Set up payroll (if salary) Free-$300
DIY vs Lawyer Option Cost Best For Online service $500-$1,000 Simple situations Accountant $1,000-$2,000 Tax planning included Lawyer $1,500-$3,000 Complex situations
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