Should I incorporate?

Incorporating is three decisions, not one

Most people arrive at this question having been told that incorporating saves tax. Sometimes it does. But the tax answer is only one of three, and for a good number of businesses it is not the one that decides it.

The first decision is about deferral. A Canadian-controlled private corporation pays a low rate on active business income up to its business limit. That advantage applies only to income you leave inside the corporation. Money you pay out to yourself as salary or dividends is taxed in your hands, and the combined result is broadly similar to what you would have paid unincorporated. So the tax case for incorporating is really a case for retaining earnings — and if you draw out everything the business makes, there is little to defer and the saving largely disappears.

The second decision is about liability. A corporation is a separate legal person, and that separation is the point. For trades with physical risk, businesses signing large contracts, or anyone whose work could damage a client’s property, this can matter more than the tax. It is not absolute: incorporating does not protect you against your own negligence, and a lender or landlord who asks for a personal guarantee has undone it for that debt.

The third decision is about cost and administration. A corporation needs a T2 return, financial statements, its own set of books, its own bank account and annual filings. That is a real recurring cost, and it does not scale down for a small corporation. Below a certain level of retained income, it simply exceeds the benefit.

What actually moves the answer

Income above what you draw is the strongest single indicator, because it is what makes deferral possible at all. Stability comes next: a steady surplus is what makes the ongoing cost worth carrying, whereas an unpredictable year can leave you paying for a structure you did not use. Liability exposure can override both — some businesses incorporate at any income level because the alternative is unacceptable. Planned reinvestment in equipment, staff or working capital points the same way as retained income. And provincial residency changes the size of the answer without usually changing its direction, since corporate and personal rates differ across the country.

One consideration cuts the other way. If clients require you to be incorporated and you would otherwise be their employee, incorporating may put you within the personal services business rules — which remove the small business deduction, remove the general rate reduction, add a further 5% tax and restrict what you can deduct. That is the one case where incorporating can leave you worse off than not, and it is worth checking before rather than after.

What to do with the result

This gives you the direction. For the dollars, run the incorporation tax calculator with your own figures — it compares sole-proprietor tax against the small-business corporate rate on the income you actually leave in. Then weigh the non-tax reasons alongside it, because they do not appear in that number.