Should I incorporate yet?

Incorporating can lower the tax on business profit that you leave in the company. Money you take out for yourself is taxed on your personal return. So the tax advantage matters most when the business earns more than you need to live on, and much less when you take out everything it makes.

What changes when you incorporate

Incorporating creates a new legal entity, the corporation, that’s separate from you:

• It’s taxed separately. The corporation pays tax on its own income, at corporate rates, which are generally lower than personal income tax rates.
• It files its own return. A corporation has to file a T2 return for every tax year, even when it owes no tax, within six months of its year-end. A Canadian-controlled private corporation (CCPC) has to file electronically.
• It limits your liability. Shareholders aren’t responsible for the corporation’s debts; if it goes bankrupt, they can lose only what they invested.
• It carries on without you. A corporation can own property, borrow and sign contracts in its own name, and it continues until it’s wound up, rather than ending when the owner dies.

To use the money personally, you have to take it out of the corporation. Dividends from a taxable Canadian corporation, for example, go on your personal return, where you can generally claim the dividend tax credit. Your options are covered in Paying yourself: salary or dividends?

How the corporate rate works

The federal net tax rate on a corporation’s income is 15%. A CCPC can claim the small business deduction, which brings the federal rate down to 9% on active business income up to its business limit. For a corporation that isn’t associated with any other, the federal business limit is $500,000.

Provinces and territories tax corporate income too, generally at two rates: a lower rate on income eligible for the small business deduction, and a higher rate on all other income. In British Columbia, for example, the lower rate is 2%. Some provinces set their own business limit. Our corporate tax rates table lists them all.

The business limit can shrink:

• Associated corporations share one limit. Corporations that are associated with each other divide a single business limit among them.
• Passive investment income reduces it. If the corporation, and any company it’s associated with, earns enough investment income, the limit goes down, and it can disappear entirely. See holding investments in a corporation.

For more on who qualifies, see the small business deduction.

Questions that tell you if it’s worth it yet

1. Would profit stay in the company? The low corporate rate is most useful on money the business keeps, for example to grow the business or build a cushion. If you’d pay out everything each year, it lands on your personal return anyway.
2. How does your personal rate compare? Look up your marginal rate in our income tax brackets and compare it with the small business rates in our corporate tax table.
3. Are you ready for the extra work and cost? A corporation has to file its own T2 return every year, even in a year it owes nothing, and you need to set up a way to pay yourself from it.
4. Do the non-tax benefits matter? Limited liability, the corporation’s continuity and, with federal incorporation, the right to use your business name across Canada can matter on their own.
5. Do you already own a company? If the new corporation would be associated with it, the two would share one business limit.

The answer depends on your numbers and your plans. This is one decision where an accountant’s view of your own figures is worth getting.

What to do

• Estimate how much profit you could leave in the business each year.
• Compare the corporate tax rates for your province with your personal marginal rate.
• Read salary or dividends to see how you’d pay yourself.
• If you go ahead, use the T2 dates tool on our business page to see when the corporation’s return and balance would be due for the year-end you choose.