When you incorporate your business, you create a separate legal entity, which fundamentally changes how you report income and pay taxes. Instead of reporting all business income on your personal tax return (Form T1 General), your corporation files its own tax return (Form T2 Corporate), and you only report personal income such as salary, dividends, or interest from the corporation on your T1. This separation means your personal tax return becomes simpler in some ways (no business expenses to itemize) but more complex in others (you now coordinate two tax filings instead of one). Before incorporation, self-employed income flows directly to your personal return. After incorporation, your income comes from the corporation in two main ways: - Salary or wages paid to you as an employee (subject to payroll deductions) - Dividends paid from corporate profits (subject to dividend tax credit rules) Your corporation must track its own income and expenses separately. The corporation pays corporate income tax on its profits, and then you pay personal tax on whatever you withdraw (salary or dividends). This creates what's sometimes called "double taxation" on dividends, though Canadian dividend tax credits reduce the impact.
Yes. Your corporation files a separate corporate return, but you still file a personal T1 to report any salary, dividends, or other personal income you receive. Both filings are required.
It may, depending on your income level, province, and how you take money out of the corporation. Lower personal income can increase eligibility for certain credits and allow you to retain earnings in the corporation at a lower tax rate, but this varies by situation.
The main advantage is income splitting and deferral. You can keep earnings in the corporation and reinvest them, pay lower corporate tax rates on retained profits, and have more control over when and how much you withdraw as personal income (salary or dividends).
No, you don't lose deductions. Your corporation simply deducts business expenses from corporate income instead of you deducting them from personal income. The corporation's profit is what you then report as personal income when withdrawn.
Your RRSP room is based on your personal net income, which may be lower after incorporation if profits stay in the corporation. However, the corporation can contribute to a corporate RRSP or pension plan, giving you alternative retirement savings options.