Self-Employed vs Incorporated in Canada: Which Structure Fits?

A sole proprietorship and a corporation tax the same business very differently. This page, part of the corporate tax hub, explains how, and what each structure costs and protects. For the tax rates and planning inside a corporation in more depth, see the corporate tax hub.

Quick comparison

The 9% rate comes from the small business deduction, which has these conditions:

• The corporation was a Canadian-controlled private corporation (CCPC) throughout the taxation year.
• It applies only to income from an active business carried on in Canada: the deduction is on the least of that income, taxable income and the business limit.
• The business limit is $500,000 a year (prorated for a short taxation year), shared among associated corporations.
• The business limit is reduced by $5 for every dollar of adjusted aggregate investment income of the corporation and its associated corporations over $50,000 in the previous year, reaching zero at $150,000.
• The business limit is also reduced on a straight-line basis when the combined taxable capital employed in Canada of the corporation and its associated corporations is between $10 million and $50 million (for taxation years beginning on or after April 7, 2022); it is zero at $50 million or more.

How deferral and integration work

The gap between the corporate rate and your personal rate is the tax deferred while profit stays in the corporation. When the corporation later pays you a salary or dividends, personal tax is due. Canada’s integration system is designed so that the total tax on income earned through a corporation and paid out ends up roughly similar to earning it personally; in practice it isn’t exact, and it differs by province.

So the benefit depends on how much you leave in the corporation. If you need all the profit to live on, it’s paid out and taxed personally anyway, and little is deferred. That’s why incorporating tends to be considered when a business earns noticeably more than its owner spends. The salary vs dividend calculator works through the numbers for a province and income.

Provincial rates

The federal small business rate is 9% (Canada Revenue Agency), and each province adds its own lower rate on small business income, so the combined rate differs across the country. The CRA’s provincial and territorial corporation tax pages link to each province’s current rates. Rental and other passive income is taxed differently; see real estate investing in a corporation.

Paying yourself: salary vs dividends

If you control more than 40% of the corporation’s voting shares, your employment isn’t insurable for EI, so a salary doesn’t give access to regular EI; you can opt in to EI special benefits as a self-employed person (in Quebec, maternity and parental benefits come from the QPIP). Many owners use a mix of salary and dividends.

Liability

A sole proprietor is personally responsible for the business’s debts and claims against it. A corporation is a separate legal person, so its debts are generally its own, but there are important exceptions: lenders often ask owners for personal guarantees, and directors can be personally liable for certain unremitted amounts such as payroll source deductions and GST/HST. Insurance matters under either structure.

Income splitting

Since 2018, the tax on split income (TOSI) also applies to adults: dividends or interest (not salary) and certain capital gains that a family member gets from a private corporation's related business are taxed at the top marginal rate unless an exclusion applies. The main exclusions: the person is actively engaged in the business (on average at least 20 hours a week in the year or any five earlier years); at 25 or older, they own excluded shares or get a reasonable return for their work, property and risk; from 18 to 24, the amount is a safe harbour capital return or a reasonable return on arm's-length capital they contributed; or the amount would be excluded for their spouse or common-law partner aged 65 or older. A salary paid to a family member must be reasonable for work actually done. The CRA’s guidance on the split income rules explains the main exclusions with examples, and the CRA’s line 40424 page lists all of them.

Selling the business

If you sell shares of your corporation, the gain may be sheltered by the lifetime capital gains exemption, which is indexed each year; a sole proprietor selling business assets generally doesn’t have access to it, unless the assets are qualified farm or fishing property. The shares have to be qualified small business corporation shares:

• When you sell, the share is a share of a small business corporation, owned by you, your spouse or common-law partner, or a partnership you are a member of.
• A small business corporation is a Canadian-controlled private corporation with 90% or more of the fair market value of its assets used mainly in an active business carried on primarily in Canada, or in shares or debts of connected small business corporations.
• Throughout the 24 months before the sale, no one other than you, a partnership you were a member of, or a person related to you owned the share.
• Throughout those 24 months, while you or a related person owned it, it was a share of a CCPC with more than 50% of the fair market value of its assets used mainly in an active business carried on primarily in Canada (or in shares or debts of connected corporations).
• You were resident in Canada throughout the year of the sale.
• You have exemption room left: the exemption is a lifetime amount ($1,275,000 for 2026), and the capital gains deduction is half of it.

Selling your business covers these tests in more detail.

What incorporating costs

A corporation has costs a sole proprietorship doesn’t: government filing fees to incorporate (and legal fees if you use a lawyer), an annual corporate tax return and financial statements, annual government filings, and usually more bookkeeping. Quotes vary with the province and the business, so an accountant’s quote is the practical starting point.

How to incorporate

1. Choose a name, or use a numbered company. A name search (such as a NUANS report) checks it isn’t already taken.
2. Incorporate federally through Corporations Canada or with your province.
3. Get a business number and the CRA program accounts you need (corporate income tax, GST/HST, payroll).
4. Open a business bank account and keep business and personal money separate.
5. Set up payroll if you’ll pay yourself a salary.

For registering a business in the first place, see starting a business in Canada.

Related resources

• Corporate tax hub
• Salary vs dividend calculator
• Self-employed tax guides
• Side hustle taxes
• CCPC tax planning guide
• Lifetime capital gains exemption
• Dividend tax credit