Should I Incorporate? Understanding the Benefits and Timing of Incorporation

Should I Incorporate? Benefits, CRA Guidelines, Savings, and the Right Timing

If you're self-employed, a small business owner, or a freelancer in Canada, you've probably asked yourself:
"Should I incorporate my business?"

It’s a big decision — and getting it right can save you thousands in taxes and protect you legally.
In this post, we’ll walk through the benefits, CRA guidelines, potential savings, pros and cons, and the best time to make the move.

What Does It Mean to Incorporate?

When you incorporate, you create a separate legal entity — your corporation is distinct from you personally.

This means:

• The business can own assets, enter contracts, and take on liabilities.

• You become a shareholder (and often a director) of your own company.

• Your personal and business finances are legally separated.

Key Benefits of Incorporating

1. Tax Savings

Corporations are taxed at lower rates than individuals.

In 2025, the small business tax rate in Canada is about 9% federally, plus provincial rates (e.g., Alberta adds 2%, for a total ~11%).

Compare that to personal tax rates, which can climb over 40%!

Example:
If your business earns $120,000:

• As a sole proprietor, most of that is taxed at personal rates (20%–40%+).

• As a corporation, the first $500,000 of active business income could be taxed at ~11% — huge savings.

2. Income Splitting

A corporation allows you to pay family members reasonable salaries or issue dividends (if they meet CRA conditions), spreading income across lower tax brackets.

(Note: CRA tightened rules under "TOSI" - Tax on Split Income. Careful planning is needed.)

3. Limited Liability Protection

Incorporation can shield your personal assets.
If the business is sued or owes money, generally only the corporation's assets are at risk — not your house or savings.

4. Better Access to Capital

Corporations can:

• Issue shares

• Borrow money more easily

• Build credibility with banks and investors

5. Deferral of Taxes

You don't have to withdraw all your company's profits immediately.
You can leave money inside the corporation, pay lower corporate tax now, and withdraw funds later when you're in a lower personal tax bracket (e.g., retirement).

CRA Guidelines: When You Must Incorporate

• You don’t have to incorporate just because you're earning income.

• However, if your business is a professional practice (like doctors, lawyers, accountants), incorporation might also involve professional corporations, which are separately regulated.

• If you operate under your own name (no "Inc." or "Ltd."), you're usually a sole proprietor in CRA's view.

• CRA sees corporations as completely separate taxpayers — they file a T2 corporate return, while individuals file a T1.

Pros & Cons of Incorporating

Pros

• Lower tax rates

• Limited liability protection

• Income splitting flexibility

• Tax deferral opportunities

Cons

• Higher setup and annual costs (lawyer, accountant)

• More complex bookkeeping and compliance

• No personal use of corporate funds without proper payroll/dividends

• Separate corporate tax returns (T2) required

When Should You Incorporate?

You should seriously consider incorporating when:

• Your business consistently earns more than $100,000–$120,000 per year.

• You don't need to withdraw all the profits immediately for personal living expenses.

• You want liability protection.

• You’re hiring employees or contractors.

• You’re investing in assets or expanding operations.

• You’re planning to sell the business one day (capital gains exemption applies to shares of Canadian Controlled Private Corporations).

Real Example

Sarah is a freelance software developer making $150,000/year.

• As a sole proprietor, she pays ~38% average tax ($57,000).

• After incorporating, her corporation pays ~11% tax ($16,500).

• Sarah pays herself a salary of $70,000 and leaves $63,500 in the corporation (saving tax until she needs it later).

Result: Sarah saves over $15,000–$20,000 per year compared to staying unincorporated!

Final Thoughts

Incorporating is powerful — but it's not for everyone.
If you’re just starting out, need all your earnings to live, or aren't making consistent profits yet, it might be smarter to stay a sole proprietor for now.

When the timing is right, though, incorporation can help you protect your assets, reduce your taxes, and set your business up for future growth.

Before you decide, talk to a tax professional or CPA.
A personalized consultation can save you headaches — and serious money — down the road.