Incorporating is one of the biggest decisions a growing business makes. It can save real money, but it also adds cost and paperwork. Here is how to think about it.
Where the tax saving comes from
A Canadian-controlled private corporation pays a lower small business rate on active business income, currently 12.2% combined in Ontario on the first $500,000. When you earn income personally, the same profit can be taxed at much higher personal rates.
The key point: the saving only applies to money you leave in the corporation. When you pay it out to yourself as salary or dividends, you pay personal tax on it. Incorporation mainly gives you a tax deferral on profit you don't need to live on.
Other benefits
- Limited liability for most business debts (personal guarantees and professional liability can still apply)
- Flexibility to choose salary, dividends or a mix each year
- Possible access to the lifetime capital gains exemption when you sell qualifying shares
- Room for future planning, such as a holding company or estate freeze
The costs
- A separate corporate tax return (T2) and financial statements every year
- An Ontario annual return through the Ontario Business Registry
- Separate bank accounts and more careful bookkeeping
- Payroll accounts if you pay yourself a salary
A simple rule of thumb
If your business earns more than you need to cover your personal living costs, incorporating is worth a closer look. If you spend everything the business earns, the benefit is usually small.
Questions to answer first
- How much profit do you expect, and how much do you need personally?
- Do you work for one main client? (If so, ask about personal services business rules.)
- Do you plan to sell the business one day?
- Will family members be involved?
We run the numbers both ways before recommending a structure. Book a free 15-minute consultation to talk it through.
This article is general information, not tax advice. Rules and amounts change; contact us about your situation.