Is incorporation right for your business?

Every growing business eventually reaches the point where someone asks whether it should incorporate. A sole proprietorship is simpler and cheaper to run, and for some businesses it stays the right answer for years. The case for incorporating rests on two things that a proprietorship cannot offer: a lower rate of tax on profit you do not need to spend, and a legal wall between the business and your personal assets.

The small business deduction

A Canadian-controlled private corporation qualifies for the small business deduction on its active business income, up to an annual business limit. The federal business limit has been $500,000 for years, and Ontario matches it. Income within that limit is taxed at a combined federal and Ontario small business rate that sits well under half of Ontario's top personal marginal rate, which is above 50%. The exact combined rate has changed more than once recently, so confirm the current figure for your year end rather than relying on a number in an article.

Two things narrow the deduction and catch people out:

• Passive investment income. Once a corporation and its associated companies earn passive investment income above a threshold, the business limit is ground down and can be eliminated entirely. Corporations holding a large investment portfolio inside the operating company are the usual casualty.
• Association and sharing. If you control more than one corporation, the group shares a single business limit. Setting up a second company does not create a second $500,000.

Deferral is the real benefit, and it is a deferral

The saving is on profit that stays in the corporation. If a consultant earning $150,000 as a proprietor incorporates and only needs $90,000 to live on, the remaining profit is taxed at the small business rate instead of at personal rates, leaving materially more capital inside the business to reinvest.

When that money eventually comes out as salary or dividends, personal tax is paid then. The system is designed so the combined corporate and personal tax approximates what you would have paid personally in the first place. What you gain is the use of the money in the meantime, which is valuable if you have something to do with it and close to irrelevant if you draw out every dollar the business makes. That trade-off is the same one we work through in how to pay yourself: salary or dividends.

Limited liability, and what it does not cover

A corporation is a separate legal person. Its debts are its own, so business creditors generally cannot reach your house or personal savings, and the company can build a credit history in its own name.

The protection has real limits:

• Personal guarantees you sign for a lease, a loan or a supplier account are enforceable against you regardless of the corporation
• Directors are personally liable for unremitted GST/HST and payroll source deductions
• Incorporating does not shield you from liability for your own negligence or your own professional work

Tax planning that becomes available

Incorporation opens up planning that does not exist for a proprietor:

• Choosing between salary and dividends, and changing the mix year to year
• Timing income across fiscal years rather than being locked into December 31
• Paying dividends to family shareholders, subject to the tax on split income rules that have applied to adults since 2018. The pre-2018 practice of sprinkling dividends across the family without regard to who works in the business no longer holds up, and the current rules are set out in our article on reasonable family salaries
• Access to the lifetime capital gains exemption on a sale of qualifying small business corporation shares, if the corporation meets the asset and holding period tests. The exemption amount is indexed, so check the figure for the year of sale
• Corporate ownership of assets and a longer runway for succession planning

What it costs to run

• Incorporation fees and a minute book that has to be maintained
• A T2 corporate return every year, plus financial statements
• Separate bank accounts, separate books and a stricter line between business and personal spending
• Payroll or T5 filings depending on how you pay yourself
• Annual accounting and legal costs that are higher than a proprietor's

Our plans start at $350 a month and we quote a fixed fee on the call, so the comparison is a real one.

When it is too early

If the business earns less than you need to live on, there is no profit left inside to defer tax on, and the annual compliance cost buys you liability protection alone. That can still be worth it in a trade with real exposure. It is often not worth it for a side business turning over $40,000.

The questions to answer first are how much profit you expect to leave in the business, what liability the work carries, and whether customers or lenders expect a corporation. Our corporate and personal tax work starts with that assessment rather than with the incorporation itself.

All of our corporate and personal tax work

General information only, current at August 2026. Tax rules change and GST/HST status is fact-specific. Confirm your own position before relying on anything here.