Corporation vs Sole Proprietorship
Corporation or sole proprietorship: how each is taxed, a worked Ontario example, when incorporating pays and how to switch.
The short version
- A sole proprietor pays personal tax on all the business profit every year, whether or not the money is taken out. A corporation pays corporate tax on its profit, and the owner pays personal tax only on what the corporation pays out as salary or dividends.
- A Canadian-controlled private corporation pays about 9% federal plus a small provincial rate on its first $500,000 of active business income: 11.2% combined in Ontario since July 1, 2026 (12.2% before).
- The big advantage is deferral: profit you leave in the company is taxed at the low corporate rate until you take it out. It's a deferral, not a permanent saving; the tax system is designed so the total is roughly the same once everything is paid out.
- Incorporating costs money every year (a separate T2 return, bookkeeping, legal upkeep), so it usually makes sense only when profits are well above what you need to live on.
- Limited liability is real for business debts, but not for your own negligence, personal guarantees or unremitted payroll and GST/HST, where directors can be liable.
Corporation vs Sole Proprietorship in Canada
"Should I incorporate?" is usually asked by someone who just had a good year and a bad April. Incorporation can save real money, but not in the way most people expect, and not for everyone. The question isn't really how much tax a corporation pays. It's how much of your profit you can afford to leave in the company. Here's the honest version.
Side by Side
| Sole proprietorship | Corporation | |
|---|---|---|
| Tax on profit | Personal rates on all of it, every year | Corporate rate on profit; personal tax only on what you take out |
| CPP | Both halves on all net self-employment income | On salary only (the company pays the employer half); none on dividends |
| Losses | Reduce your other personal income | Stay in the corporation |
| Returns | T2125 with your T1 | Separate T2 every year, plus T4s or T5s for what you pay yourself |
| Annual cost | Low | Higher: accounting, T2, corporate filings |
| Liability | Personal for all business debts | Limited for most business debts, with important exceptions |
| Income splitting with family | Wages for real work only | Wages, plus dividends where the TOSI rules allow |
| Selling the business | Asset sale | Share sale may qualify for the lifetime capital gains exemption |
Should you incorporate yet?
Enter your expected profit, province, what you need to live on and your family situation. The assistant compares a sole proprietorship and a corporation for this year and the long run, including the extra costs.
A Worked Example: Ontario, $150,000 of Profit
The owner needs $80,000 a year to live on.
| Tax paid this year (approximate, 2026) | Sole proprietor | Corporation paying $80,000 salary |
|---|---|---|
| Personal income tax | $38,350 (on $150,000) | $14,130 (on $80,000) |
| CPP (both halves) | $9,290 | $8,890 ($4,445 each side) |
| Corporate tax: 11.2% on the $65,555 left in the company | – | $7,340 |
| Total tax paid this year | about $47,640 | about $30,360 |
| Money left in the company | – | about $58,210 |
That $17,280 difference is mostly deferral. When the $58,210 comes out later as dividends, personal tax is due on it, and over a lifetime the totals come much closer. The deferral is worth having if the money stays invested in the company for years, or comes out later in lower-income years, such as retirement. If you need every dollar of profit to live on, incorporating mostly adds cost. Salary-versus-dividend choices are a separate decision; see salary vs dividends.
Run your own numbers with the should I incorporate calculator.
When Incorporating Usually Makes Sense
- Profit is consistently well above what you take out to live on.
- You plan to reinvest in the business (equipment, staff, growth).
- The business has real liability risk that insurance doesn't cover.
- You may sell the business one day (the lifetime capital gains exemption on qualifying small business shares).
- A spouse or adult children are actively involved in the business.
When It Usually Doesn't
- Profit roughly equals what you spend personally.
- The business is new and may lose money (losses are more useful against personal income).
- You'd be a one-client contractor who looks like an employee: a personal services business pays a high corporate rate and can deduct almost nothing. See contractor vs employee.
- You're not prepared for the bookkeeping and the separate bank account discipline.
Switching From Sole Proprietor to Corporation
- Incorporate (federally or provincially) and open a business bank account.
- Transfer business assets to the corporation; a section 85 election can avoid tax on the transfer.
- Register the corporation for GST/HST and payroll; close the proprietorship's GST/HST account; see closing a GST/HST account.
- Report the proprietorship's final period on your personal return.
- Set up how you'll pay yourself, and the corporation's year-end.
Depreciation on transferred equipment continues in the corporation; see capital cost allowance. Paying family is covered on paying your spouse and paying your children. Sole proprietor basics are on sole proprietor taxes.
Corporation vs Sole Proprietorship Questions
When should I incorporate my business in Canada?
Usually when profits are consistently well above what you need to live on, so you can leave money in the corporation at the low small business rate. If you need all the profit personally, incorporating mostly adds cost.
Does a corporation pay less tax than a sole proprietor?
It pays less tax up front on profit left in the company. When that money is paid out as dividends, personal tax applies, and the system is designed so the total is roughly similar. The main benefit is deferral.
What is the small business tax rate in Ontario?
For a Canadian-controlled private corporation, 9% federal plus 2.2% Ontario, or 11.2% on the first $500,000 of active business income, since July 1, 2026. It was 12.2% before that date.
Do I pay CPP if I am incorporated?
On salary you pay yourself, yes, with the corporation paying the employer half. Dividends are not subject to CPP.
Does incorporating protect my personal assets?
For most business debts, yes. It does not protect against your own negligence, debts you personally guarantee, or director liability for unremitted payroll deductions and GST/HST.
Sources: CRA, Corporation tax rates; Guide T4002. Checked October 2026. Personal tax and CPP figures come from our 2026 Ontario rules engine; the example assumes the owner's salary is not insurable for EI and ignores the corporation's extra costs. Real decisions depend on dividends, investment income and family situation; get advice before incorporating.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.