Incorporate, or Stay
a Sole Proprietor?

What Changes on Paper

As a sole proprietor you and the business are the same person. The CRA's definition is one line: an unincorporated business owned by one individual, the simplest structure there is. Its income is your income, reported on your T1 through the T2125, and the risks it runs extend to your personal property. You may register a business name or trade under your own.

A corporation is a separate legal entity. It can own property in its own name, separately and distinctly from you. It earns the income, pays its own tax, and files its own return: a T2, due no later than six months after the end of every tax year, with complete financial statements or the General Index of Financial Information attached. You become its shareholder, and usually its employee as well.

The separation is also the liability case. Shareholders are not responsible for the corporation's debts. The CRA's own page adds the caveat that matters for a small business: limited liability may not protect you from creditors where you have given a personal guarantee, and a bank lending to a one-person corporation will almost always ask for one.

The Rate That Makes the Case

A Canadian-controlled private corporation pays a net federal rate of 9% on its first $500,000 of active business income, after the small business deduction. Ontario adds its lower rate of 3.2%. Together that is 12.2% on the first $500,000, against a personal marginal rate that climbs well past that long before your income does. Above the business limit, or on income that does not qualify, the general rate applies: 15% federal and 11.5% Ontario, 26.5% together.

Here is the part the barbecue leaves out. That 12.2% is not the whole bill. It is the tax on money that stays in the corporation. The moment you take it out, as salary or as dividends, you pay personal tax on it, and the system is built so that the corporate tax plus the personal tax lands close to what you would have paid as a sole proprietor in the first place. Incorporating does not make income cheaper. It lets you choose when the second layer is paid.

So the advantage lives in the gap between what the business earns and what you draw. If you need every dollar to live on, there is no gap, and the corporation gives you the costs below without the deferral that pays for them. If the business clears more than you spend, the difference compounds inside the corporation at 12.2% instead of at your personal rate, and that is a real advantage that grows every year it runs.

How You Pay Yourself Changes

A sole proprietor takes money out of the business account and that is the end of it; the tax is worked out on the whole profit at year-end. A shareholder has two taps, and they are taxed differently.

Salary means the corporation runs a payroll: a payroll account with the CRA, source deductions on every pay, a T4 at year-end, and CPP on both sides, the employee half withheld and the employer half paid by the corporation. Salary builds RRSP room and is deductible to the corporation. Dividends come out of after-tax corporate profit, carry no CPP and build no RRSP room, and are reported on a T5 and taxed in your hands with the dividend tax credit, which is how the two layers are reconciled.

The right mix is not a preference. It moves with your income, your RRSP room, what you want from CPP later, and what the corporation is keeping. We model it on your actual figures as remuneration planning, and it feeds both the T2 and your personal return.

What It Costs to Run

The corporation starts with articles of incorporation filed through the Ontario Business Registry, and from then on it files an initial return and an annual return there, the annual one within six months of its fiscal year-end, whether or not anything changed. Those are corporate filings, separate from tax, and missing them is how a corporation ends up dissolved without anyone deciding it should be.

On the tax side it needs a business number with a corporation income tax account, the RC program account, plus the RT account if it charges HST and the RP account if it runs a payroll. Since November 3, 2025 those registrations are done online, through Business Registration Online, behind a CRA account sign-in. It needs its own bank account and its own set of books, kept to a standard that can produce the financial statements the T2 attaches; our bookkeeping fees are fixed by volume. And it needs the T2 itself, from $999 when the books are up to date, every year it exists, including the years it earns nothing.

Add it up honestly before you decide. A corporation that earns $60,000 and pays all of it out as salary has bought a second return, a payroll, and two sets of filings, for a deferral of nothing.

When It Isn't Worth It

Three situations come up again and again. The first is the one above: the business earns what you live on, so there is nothing to leave inside.

The second is one client who is really an employer. If you would be their employee but for the corporation, the CRA treats the corporation as a personal services business: it loses the small business deduction, pays tax at a higher rate, and can deduct almost nothing beyond the salary it pays you. Incorporating does not turn an employment relationship into a business one. Our employee or subcontractor guide covers the tests the CRA applies, and they apply the same way through a corporation.

The third is the early years. A sole proprietor's business loss comes off their other income on the same return. A corporation's loss belongs to the corporation. It carries forward against the corporation's own future profit, but it does nothing for the salary you earned elsewhere while you built the business, and a start-up that loses money for two years before it works has given those losses the least useful home.