Whether incorporating your contracting business makes sense depends on your income level, business structure, and long-term goals. In Canada, some contractors benefit from incorporating because it can lower overall taxes through income splitting, deferred income strategies, and small business deductions. However, incorporation also adds accounting costs, complexity, and administrative requirements that may not justify the tax savings if your income is modest. The right choice is deeply personal and depends on your specific financial situation. When you work as a self-employed contractor, you're a sole proprietor by default. That means your business income flows directly to your personal tax return, and you pay tax at your marginal rate. For high-income contractors, this can mean paying 40-50% or more in combined federal and provincial taxes. Incorporating creates a separate legal entity. Instead of income going straight to you, it goes to the corporation. The corporation pays tax at the small business rate (roughly 11-13% federally, depending on your province), which is much lower than personal rates. This creates a potential tax advantage.
Incorporation can save taxes for contractors earning over $100,000 to $120,000 annually through the small business deduction and income deferral strategies. However, incorporation costs (accounting, legal, administration) often outweigh savings for contractors earning less than $80,000 per year. Your specific savings depend on your income, province, and how you withdraw money from the corporation.
Salary is paid from your corporation and counts as a deductible business expense. Dividends come from after-tax corporate profits and receive a tax credit on your personal return. For most Canadian contractors, the combined tax cost of salary and dividends is roughly equal, though the salary approach typically generates more RRSP contribution room.
Initial incorporation costs range from $500 to $2,000 depending on whether you incorporate federally or provincially and whether you hire a lawyer. Annual accounting and compliance costs typically run $1,500 to $3,500 per year. These ongoing costs significantly impact whether incorporation actually saves you money.
Yes, this CRA rule applies if your corporation earns active business income (not passive investment income). The small business deduction reduces corporate tax rates from around 26-27% to roughly 11-13%, depending on your province. Passive income like investment returns doesn't qualify for the SBD.
Yes. If you pay yourself a salary from your corporation, both you and the corporation must contribute CPP (similar to an employee). If you take dividends instead, you don't trigger CPP contributions, but you may have less CPP credit for retirement. This is another factor to weigh when choosing salary versus dividends.