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 β 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 |