Yes, incorporating your business can defer taxes by allowing you to retain earnings inside the corporation at the lower corporate tax rate instead of paying personal income tax immediately. However, the deferral is only temporary because taxes are eventually due when you withdraw money as salary, dividends, or capital gains. The real tax advantage comes from the spread between the lower corporate rate and your personal marginal rate, combined with the time value of money. When you run a sole proprietorship, your net business income is added to your personal tax return each year, and you pay personal income tax on it. If you incorporate, the business earns income at the corporate level first. Here's the basic flow: - Business generates $100,000 in profit - If sole proprietor: you pay personal tax on the full $100,000 immediately - If corporation: the corporation pays corporate tax (lower rate), then you decide when to extract the remaining funds - If you leave money in the corporation (retained earnings), you avoid paying personal tax on it this year This deferral can be powerful for cash flow, especially in growth years when you want to reinvest profits.
The saving equals the gap between your corporate tax rate and your personal marginal tax rate, multiplied by the amount retained. For example, if the corporate rate is 25% and your rate is 50%, you save 25 cents per dollar deferred. However, you must eventually pay personal tax when you withdraw the money.
No. The CRA rule is that you eventually owe personal tax when you extract the money. Deferral only works if you never withdraw the funds, but that defeats the purpose of earning the income. Deferral is valuable for timing and reinvestment, not elimination of tax.
It depends on your personal tax bracket and your province's rates. At lower incomes, salary is often better because it's fully deductible to the corporation. At higher incomes, dividends may result in lower total tax due to integration. Use a salary vs dividend calculator to see which is best for your situation.
Only if your spouse owns shares in the corporation. If they don't, the CRA will not allow the dividend deduction. The dividend must be proportional to their actual ownership stake in the business.
The federal small business rate is approximately 11.5% on the first $500,000 of active business income. Combined with provincial rates, the total typically ranges from 20-30% depending on your province. Check the CRA website or your provincial government for exact 2026 rates.