Why owners incorporate
- Tax deferral. Active business income up to $500,000 is taxed at 11.2% in the corporation. You pay personal tax later, when you take salary or dividends.
- Limited liability. Business debts generally stay with the company, though banks often ask for personal guarantees.
- Flexibility in paying yourself. Salary, dividends or a mix, timed to suit your personal tax bracket.
- A future sale. Shares of a qualifying small business corporation may be eligible for the lifetime capital gains exemption.
What it costs
A corporation needs year-end financial statements, a T2 corporate return, an Ontario annual return and, if you pay yourself, payroll or dividend slips. That typically adds a few thousand dollars a year in accounting and filing fees compared with a sole proprietorship.
When it usually makes sense
| Your situation | Incorporate? |
|---|---|
| You spend almost everything the business earns | Usually not yet |
| The business earns well beyond what you need each year | Usually yes |
| You face real liability risk from customers or contracts | Worth considering, alongside insurance |
| You plan to sell the business one day | Worth planning early |
Things people overlook
- Paying family members dividends is limited by the tax on split income rules
- Money taken out of the company for personal use without salary or dividends can become a taxable shareholder loan
- Investment income inside the company is taxed at a high rate and can reduce the small business limit
- Regulated professionals, such as doctors and dentists, incorporate as professional corporations under their college’s rules
We look at your actual numbers and show you the after-tax result both ways before you decide. See incorporating a business in Ontario.
Common questions
How much income do I need before incorporating?
There is no single number. It depends on how much you need to live on, because the savings come from profit left in the company. We compare both options with your figures.
Ontario or federal incorporation?
If you operate mainly in Ontario, a provincial corporation is usually simpler and cheaper. Federal incorporation gives wider name protection across Canada.
Can I incorporate partway through the year?
Yes. The sole proprietorship ends, the corporation starts, and assets can usually be transferred to the corporation on a tax-deferred basis with the right election.
This article is general information based on the rules as of its date, not advice for your situation. Talk to us before acting on it.
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