Should I incorporate my small business in Ontario?
Should I incorporate my small business in Ontario?
By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA
Deciding whether to incorporate your small business in Ontario is one of the most significant strategic decisions you’ll make as an entrepreneur. While incorporation offers powerful tax advantages and legal protections, it also brings additional costs and administrative complexity. The right choice depends on your revenue, profit margins, liability exposure, and growth plans.
When Incorporation Makes Financial Sense
The primary financial benefit of incorporation is the tax deferral opportunity. Ontario corporations pay a combined federal-provincial tax rate of approximately 12.2% on the first $500,000 of active business income (as of 2024), compared to personal tax rates that can exceed 53% for high earners in Ontario.
If your business generates more profit than you need to cover personal living expenses, incorporating allows you to:
- Leave surplus earnings in the corporation taxed at 12.2%
- Invest retained earnings for business growth
- Withdraw funds strategically as dividends in lower-income years
- Build tax-deferred wealth within the corporation
Rule of thumb: If your business consistently generates $60,000+ in annual profit beyond your personal draw needs, incorporation typically delivers meaningful tax savings. Our corporate tax planning services help Mississauga and GTA businesses model the exact break-even point based on their specific situation.
Limited Liability Protection
Incorporation creates a separate legal entity, shielding your personal assets from most business liabilities. If your corporation is sued or goes bankrupt, creditors generally cannot pursue your home, personal savings, or other assets.
This protection is critical if you:
- Operate in industries with high liability risk (construction, healthcare, consulting)
- Have significant personal assets to protect
- Work with large contracts or commercial clients
- Employ staff who could create liability exposure
However, personal liability protection has limits. You remain personally liable for:
- Personal guarantees on loans or leases (common requirement for small businesses)
- Fraud, negligence, or criminal acts
- Unremitted HST, payroll source deductions, or other statutory obligations
- Director liability for certain corporate debts
Understanding what triggers a CRA audit is essential, as personal director liability for unremitted taxes can pierce the corporate veil.
Income Splitting Opportunities
Ontario corporations enable income splitting with family members through:
- Dividend payments to adult family members who are shareholders
- Reasonable salaries to family members who perform legitimate work for the business
- Trust structures for minor children (subject to complex tax rules)
Recent Tax on Split Income (TOSI) rules have restricted aggressive income splitting, but legitimate opportunities remain for spouses actively involved in the business. Proper planning is essential to avoid penalties—our team at Insight Accounting CPA in Toronto helps clients navigate these rules compliantly.
Access to Small Business Deduction
The Small Business Deduction provides the preferential 12.2% tax rate on up to $500,000 of active business income annually. This creates enormous tax deferral potential compared to sole proprietorship taxation.
Additionally, corporations can:
- Deduct a wider range of expenses (certain insurance, health benefits)
- Carry forward losses indefinitely to offset future profits
- Claim the Lifetime Capital Gains Exemption (up to $1.016 million tax-free on qualified shares)
- Access SR&ED tax credits for technology development and innovation
When NOT to Incorporate
Incorporation may not make sense if:
Your profit is modest: Below $40,000-$60,000 annually, the administrative costs often outweigh tax savings.
You need all business income for living expenses: Tax deferral only works if you can leave money in the corporation.
You’re in a loss position: Sole proprietorship losses immediately offset other personal income, while corporate losses only offset future corporate income.
Your industry restricts incorporation: Some professions require specific corporate structures or prohibit incorporation entirely.
You want simplicity: Corporations require separate tax returns (adding $800-$2,500+ annually in CPA costs), corporate record-keeping, and minute books.
The Hidden Costs of Incorporation
Beyond the $300 provincial incorporation fee and $200 federal fee, ongoing costs include:
- Annual corporate tax return preparation ($800-$2,500+)
- Annual corporate filings and minute book updates ($300-$800)
- Separate business bank account fees (often $30-$80/month)
- Corporate accounting and bookkeeping services ($200-$1,000/month)
- Legal fees for shareholder agreements, contracts ($1,500-$5,000+)
Our Mississauga accounting firm provides transparent pricing and helps you determine whether these costs are justified by the tax savings and protection you’ll receive.
Timing Your Incorporation
Many businesses start as sole proprietorships and incorporate once they reach profitability. This hybrid approach allows you to:
- Test your business model without corporate complexity
- Offset startup losses against other personal income
- Incorporate once sustainable profit justifies the structure
You can incorporate mid-year, with a fiscal year-end that optimizes tax planning. Our fractional CFO services help growing GTA businesses time their incorporation for maximum advantage.
Alternative Structures to Consider
Before defaulting to incorporation, evaluate:
- Sole Proprietorship: Simplest structure, no separate tax return, losses offset personal income immediately
- Partnership: Shares income/losses among partners, flow-through taxation, formal agreement essential
- Professional Corporation: Required for regulated professions (CPA, lawyers, doctors), specific rules apply
Each has distinct tax implications and legal considerations based on your industry and circumstances.
Next Steps
If you’re considering incorporation, the process involves:
Understanding HST registration thresholds and record-keeping requirements is essential during this transition.
Ready to evaluate if incorporation is right for your Ontario business? Call (905) 270-1873 or start here.
Frequently Asked Questions
Can I incorporate myself or do I need a lawyer?
While online incorporation services exist, professional guidance from both a lawyer and CPA is strongly recommended. A lawyer ensures proper share structure and shareholder agreements, while a CPA models the tax implications. DIY incorporation often results in suboptimal structures that are expensive to fix later. The $2,000-$4,000 invested upfront saves tens of thousands long-term.
What’s the difference between federal and provincial incorporation in Ontario?
Federal incorporation allows you to operate under the same name across Canada and may provide stronger name protection, but costs more upfront ($200 federal fee vs. $300 Ontario online). Provincial incorporation is adequate for most small businesses operating primarily in Ontario. The tax treatment is identical—both access the Small Business Deduction and Ontario corporate tax rates.
How does incorporation affect my eligibility for government benefits and programs?
As a corporation owner, you choose how to pay yourself (salary vs. dividends). Salary creates RRSP contribution room and CPP credits but has higher immediate tax. Dividends are tax-efficient but don’t create RRSP room or count toward CPP. If you’re planning maternity/paternity leave or need to qualify for a mortgage, salary may be strategically important despite higher tax. Our corporate tax planning team in the Greater Toronto Area helps you optimize your compensation strategy.
Insight Accounting CPA specializes in incorporation planning and ongoing corporate tax compliance for Ontario small businesses. Our AI-powered advisory services with patent-pending governance frameworks help you make data-driven decisions about business structure and growth.
Book a consultation: (905) 270-1873 or get started.