As a sole proprietor, you report all business income on your personal tax return and pay tax at your marginal rate. When you incorporate, your business becomes a separate legal entity that files its own tax return and pays corporate income tax rates, which are often lower than personal rates. You then decide whether to take money out as salary (which is deductible to the corporation) or dividends (which may benefit from preferential tax treatment). This fundamental shift creates opportunities for tax deferral, income splitting, and reinvestment that simply don't exist for sole proprietors. Canadian corporations pay tax at the corporate rate in their province, which is typically lower than the top marginal tax rate. For example, if you're a sole proprietor earning $100,000 in Ontario, you might pay personal tax at roughly 43%. But if that same $100,000 stays in a corporation, it may only be taxed at around 26% (the combined federal and provincial small business rate). This creates what tax professionals call "tax deferral" - you keep more money in the company and pay personal tax only when you withdraw it later.
Not always. Corporate tax rates are typically lower on the first $500,000 of income (via the small business deduction), but once you withdraw profits as salary or dividends, the combined rate can exceed your personal rate depending on your income level and province. The real benefit is tax deferral: keeping money in the corporation longer and paying tax later.
Yes, when you extract money from the corporation (as salary or dividends), you pay personal tax on that amount. However, the corporation only pays tax on income it keeps. This is called integration, and the tax system is designed so the combined corporate and personal tax roughly equals what you'd pay if you were a sole proprietor, though the timing differs.
Largely yes. Corporations can deduct reasonable business expenses like rent, utilities, salaries, and equipment. However, corporations cannot deduct some items sole proprietors can (like certain home office expenses proportionally), and they must follow stricter rules on meals and entertainment deductions.
Profits retained in the corporation are taxed at the corporate rate but are not taxed personally until you withdraw them as dividends or salary. This allows money to compound and grow tax-efficiently inside the company, which is especially valuable for long-term business growth or reinvestment.
The small business deduction applies to Canadian-controlled private corporations (CCPCs) earning active business income, up to $500,000 per year. Passive income (like investment returns) and businesses owned by non-residents do not qualify. This CRA rule may apply to you if your corporation is Canadian-owned and actively generates business revenue.