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Should I Incorporate My Side Hustle in Canada 2026?

Updated

Sole Proprietorship vs Corporation

Feature Sole Proprietorship Corporation
Legal status You personally Separate legal entity
Liability Unlimited personal liability Limited to corporate assets
Tax return Report on personal T1 (Form T2125) Separate T2 corporate return
Tax rate Personal marginal rate (20-53%) Small business rate ~12.2%
Setup cost $60-$100 (business registration) $1,000-$2,500
Annual accounting cost $200-$800 $1,500-$3,000
Income splitting Limited Yes (pay family members, dividends)
Retain earnings No (all taxed personally in year earned) Yes (leave in corp at low rate)
CPP contributions Required (both employer + employee share) Can choose salary vs dividends
Credibility/perception Individual More professional

When to Incorporate

Situation Incorporate? Why
Net income under $30,000 No Costs exceed tax benefits
Net income $30,000-$60,000 (need all the money) Probably not If you withdraw everything, no tax savings
Net income $60,000-$80,000+ (can leave some in corp) Consider it Tax deferral starts to be meaningful
Net income $100,000+ Yes Significant tax deferral and planning opportunities
Need liability protection Yes (any income level) Protects personal assets
Want to income split with spouse Yes Pay dividends to lower-income spouse
Plan to grow the business Yes Better structure for growth, hiring, contracts

Tax Comparison: Sole Prop vs Corporation

Scenario: $100,000 Net Business Income (Ontario)

Sole Proprietorship (All Personal)

Item Amount
Business income $100,000
CPP (self-employed, both shares) -$7,735
Taxable income ~$100,000
Federal + Ontario tax ~$23,000
CPP premiums ~$7,735
Total tax + CPP ~$30,735
Take-home ~$69,265

Corporation (Leave $40K Inside Corp)

Item Amount
Corporate income $100,000
Pay yourself salary $60,000
Corporate tax on remaining $40,000 (12.2%) $4,880
Personal tax on $60,000 salary ~$10,500
CPP on $60K salary (employee share) ~$3,867
Total tax + CPP ~$19,247
Take-home (personal) ~$45,633
Retained in corp ~$35,120
Tax deferred ~$11,488

The $35,120 retained in the corporation is available for business investment, corporate savings, or future withdrawal at a time when your personal tax rate is lower.

Tax Deferral Advantage

Net Income Tax as Sole Prop Tax with Corp (leave 40% in corp) Annual Deferral
$60,000 $12,000 $9,500 $2,500
$80,000 $18,000 $13,000 $5,000
$100,000 $30,700 $19,200 $11,500
$150,000 $48,000 $30,000 $18,000
$200,000 $68,000 $42,000 $26,000

Deferral is not permanent tax savings — when you eventually withdraw from the corporation, you pay personal tax. But deferral lets the money grow tax-efficiently inside the corp.

Salary vs Dividends

Factor Salary Dividends
CPP contributions Yes (builds CPP retirement) No
RRSP room Creates RRSP contribution room Does not
Personal tax deduction No Dividend tax credit
Corporate deduction Yes (reduces corp income) No (paid from after-tax corp income)
EI eligibility Yes (if you opt in) No
Childcare deductions Need earned income Doesn’t count
Withholding T4, payroll remittances T5, simpler
Most common strategy Pay salary up to RRSP max ($60K-$80K), take rest as dividends

Optimal Salary/Dividend Mix Example ($100K Corp Revenue)

Component Amount
Salary $65,000 (creates RRSP room of ~$11,700)
Corporate tax on remaining $35,000 $4,270
Dividends (rest) $30,730
Personal tax on $65K salary ~$11,500
Tax on dividends (eligible) ~$2,500
CPP on salary ~$3,700
Total all-in tax ~$21,970

Costs of Incorporation

One-Time Costs

Item Cost
Incorporation (federal) $200 (online)
Incorporation (lawyer-assisted) $1,000-$2,500
Provincial registration $0-$200
Initial setup (minute book, shares) Included with lawyer
Business number (CRA) Free
Total to incorporate $200-$2,700

Ongoing Annual Costs

Item Cost
Corporate tax return (accountant) $1,500-$3,000
Personal tax return (if complex) $300-$800
Bookkeeping $1,200-$3,600/year ($100-$300/month)
Annual filing (federal/provincial) $20-$60
Business bank account $5-$10/month
Payroll processing (if salary) $20-$50/month or DIY
Total annual overhead $3,200-$7,500

Breakeven Income Level

Annual Overhead Tax Savings Needed Net Income Threshold
$3,500 From deferral + income splitting ~$60,000-$70,000
$5,000 From deferral + income splitting ~$80,000-$90,000
$7,500 From deferral + income splitting ~$100,000+

Liability Protection

Scenario Sole Proprietorship Corporation
Client sues for $100K Personal assets at risk Only corporate assets at risk
Business debt default Creditors can seize personal assets Personal assets protected (unless personal guarantee)
Professional negligence Personally liable May still be personally liable (for regulated professions)
Lease/contract disputes Personal liability Corporate liability

Limitation: If you personally guarantee a business loan (which banks often require), incorporation does not protect you from that specific debt.

Decision Checklist

Question If Yes → Incorporate If No → Stay Sole Prop
Net income over $60K-$80K? Stay sole prop
Can you leave 30%+ of income in the corporation? Incorporation benefit is minimal
Need liability protection? ✓ (at any income) Less urgent
Want to income split with family? Simpler as sole prop
Plan to grow or hire? Sole prop may suffice
Are you comfortable with additional admin/costs? Stay sole prop for simplicity
Is this a long-term business (not just a short-term gig)? Incorporation has ongoing costs

→ Back to: Complete Canadian Tax Guide