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Should I Incorporate My Side Hustle in Canada?

Updated

Incorporating turns your business into a separate taxpayer. That changes when and how its profit is taxed, how you pay yourself and who is liable for its debts, and it adds a second tax return. This page goes through each change for a one-person business; business structures in Canada compares all the structures, and the self-employed tax calculator shows the tax and CPP you pay while unincorporated. It’s part of the self-employed taxes hub.

Sole proprietorship vs corporation

FeatureSole proprietorshipCorporation
Legal statusAn unincorporated business owned by one individual, with no legal status separate from youA separate legal entity that can own property and sign contracts in its own name
LiabilityBusiness risks extend to your personal property and assetsShareholders are not responsible for the corporation’s debts, except debts they personally guarantee
Income tax returnYour T1, with Form T2125 for the businessA T2 return for the corporation, no later than six months after the end of every tax year, even if it does not owe taxes, plus your own T1
Tax on profitYour personal rates, in the year the profit is earnedCorporate tax; the small business rate applies to qualifying active business income
CPPBoth shares on your net self-employment incomeOn salary the corporation pays you (it pays the employer share); none on dividends
Business lossesYou claim themShareholders cannot claim the corporation’s losses
Setting upNo incorporation; you can operate under your own name or register a business nameArticles of incorporation filed federally or provincially; federal online fees $200 to incorporate and $12 for each annual return

Sources: CRA, sole proprietorship and corporation; Corporations Canada fees. Provincial incorporation, registration in other provinces and professional fees are extra.

The small business rate

A corporation’s tax advantage for a small business comes from the small business deduction: The small business deduction, which brings the federal rate down to 9%, is available only to a corporation that was a Canadian-controlled private corporation (CCPC) throughout the year, and only on active business income carried on in Canada up to a $500,000 business limit that associated corporations share; the limit shrinks when the group's passive investment income is over $50,000 (reaching zero at $150,000) or its taxable capital is over $10 million.

Each province adds its own lower rate on the same income. In Ontario, the lower rate fell from 3.2% to 2.2% effective July 1, 2026, for a combined rate of 11.2% from that date (Ontario). Business structures in Canada has every province’s rate and how a rate change during a corporation’s tax year is applied.

Tax deferral: what leaving profit in the corporation is worth

The corporation pays the small business rate on profit it keeps. A sole proprietor pays personal tax on the same profit at their marginal rate. The difference is tax you don’t pay yet: when the corporation later pays the money out as dividends, you pay personal tax on them, with the dividend gross-up and tax credit.

An Ontario business with net income of $150,000 or $200,000, where the owner lives on $100,000 and the rest stays in the business. Incomes chosen for illustration. The sole proprietor’s figures are for the 2026 tax year; the corporation’s are for a corporate tax year that starts on or after July 1, 2026 (a tax year that includes days before that date prorates the Ontario rate by days). At $100,000 and above, a sole proprietor’s CPP is already at its maximum, so CPP doesn’t change the comparison.

OntarioNet income $150,000, $50,000 keptNet income $200,000, $100,000 kept
Sole proprietor: income tax on the full net income$38,349$61,165
Sole proprietor: income tax on $100,000$19,045$19,045
Sole proprietor: income tax on the part above $100,000$19,304$42,120
Corporation (tax year starting on or after July 1, 2026): tax on the part kept, at 11.2%$5,600$11,200
Tax deferred while it stays in the corporation$13,704$30,920

The table isolates the profit kept in the business. It doesn’t model how the owner’s $100,000 is paid out of the corporation (salary or dividends are taxed differently from self-employment income) or the extra cost of running a corporation.

Two limits apply to this deferral. The money is yours only after it is paid out and taxed, so it helps only if you can leave it in the business. And once the corporation’s savings earn investment income, the small business limit can shrink, as the rule above says; passive income in a corporation explains how.

Paying yourself: salary or dividends

A corporation can pay you a salary, dividends or both. The differences are rules rather than a single best mix:

  • Salary is deductible to the corporation and is employment income for you: the corporation withholds your CPP and pays the employer share, and salary counts toward the earned income that sets your RRSP room (the CRA’s T4040 earned-income chart starts from employment income on line 10100 and 10400). Your RRSP deduction limit is your unused room from past years plus the lesser of 18% of last year's earned income and the year's dollar limit, minus your pension adjustment, plus any pension adjustment reversal and minus any net past service pension adjustment. For the 2026 dollar limit of $33,810, that takes previous-year earned income of $187,833.
  • Dividends are paid from the corporation’s after-tax profit, so they aren’t deductible to it. They carry no CPP contributions and don’t create RRSP room. You pay personal tax on them with the gross-up and dividend tax credit (the federal gross-up is 15% on non-eligible dividends and 38% on eligible ones).
  • EI. If you control more than 40% of the corporation’s voting shares, your employment with it isn’t insurable for EI, so for EI you are in the same position as a self-employed person.

Salary vs dividends from a corporation works through the numbers, and the dividend vs salary calculator compares them for your income.

Paying family members: TOSI

Paying dividends to a spouse or adult children in lower tax brackets is limited by the tax on split income: 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. Salary isn’t split income, so TOSI doesn’t apply to it. Attribution rules cover the related rules on income from property you transfer to family.

Liability

A corporation’s shareholders are not responsible for its debts, but the CRA notes two gaps that matter for small owner-run corporations (CRA):

  • A lender may ask you to personally guarantee a loan to the corporation. If you do, you are personally liable for that debt if the corporation doesn’t repay it.
  • Directors can be liable for amounts the corporation failed to deduct, withhold, remit or pay under the tax, EI, CPP and excise laws, such as payroll deductions and GST/HST.

Regulated professions have their own rules on incorporating, covered in professional corporations.

Selling the business later

Selling shares of a corporation can qualify for the lifetime capital gains exemption, which a sole proprietorship’s business assets generally can’t (qualified farm or fishing property aside): A gain on qualified small business corporation shares can be sheltered by the lifetime capital gains exemption ($1,275,000 for 2026) if, when you sell, the corporation is a CCPC using 90% or more of its assets (by fair market value) mainly in an active business carried on primarily in Canada, no one other than you, your partnership or a related person owned the shares in the 24 months before the sale, more than 50% of its assets met that test throughout those 24 months, and you were resident in Canada throughout the year. Selling your business covers the planning involved.

Questions to work through

  • How much of the profit do you need to live on? Only profit left in the corporation defers personal tax. Profit paid out as salary is deductible to the corporation and taxed as your employment income; profit paid as dividends is taxed in the corporation first and again personally, with the dividend gross-up and tax credit.
  • Will family members receive dividends? TOSI decides whether that lowers tax.
  • Is liability the main concern? Weigh what a corporation protects against what a personal guarantee or insurance covers.
  • Will you sell the business? Share sales can use the lifetime capital gains exemption if the conditions are met.
  • Can you take on the extra filing? A corporation files a T2 return and annual returns, keeps corporate records and runs payroll if it pays a salary.

Sources

The figures and rules on this page come from these sources, last checked against them between August 29, 2026 and October 1, 2026. How we check facts.