Should you incorporate in Canada? What decides it, and what changes the day you do

Summary

If you run a business and have never filed paperwork to create a company, you’re a sole proprietor: you and the business are the same person in law and to the Canada Revenue Agency (the CRA), so your profit lands on your personal tax return. Incorporating creates a separate legal person that owns the business and files its own return before paying money out to you.

For 2026, a Canadian-controlled private corporation, meaning a private Canadian company not controlled by non-residents or public companies, pays 9% federal tax on its first $500,000 of business profit.¹ Your province charges its own rate on the same profit, so an Ontario company pays about 11.7% corporate tax for a December 31, 2026 year-end, after a mid-year Ontario rate changea British Columbia company pays about 11% corporate tax for a December 31, 2026 year-endan Alberta company pays about 11% corporate tax for a December 31, 2026 year-enda Saskatchewan company pays about 10% corporate tax for a December 31, 2026 year-enda Manitoba company pays about 9% corporate tax for a December 31, 2026 year-enda New Brunswick company pays about 11.5% corporate tax for a December 31, 2026 year-enda Nova Scotia company pays about 10.5% corporate tax for a December 31, 2026 year-enda Prince Edward Island company pays about 10% corporate tax for a December 31, 2026 year-enda Newfoundland and Labrador company pays about 11% corporate tax for a December 31, 2026 year-end (in Ontario, 9% federal plus a provincial rate cut to 2.2% on July 1, 2026in British Columbia, 9% federal plus a 2% provincial rate for 2026in Alberta, 9% federal plus a 2% provincial rate for 2026in Saskatchewan, 9% federal plus a 1% provincial rate for 2026in Manitoba, 9% federal plus a 0% provincial rate for 2026in New Brunswick, 9% federal plus a 2.5% provincial rate for 2026in Nova Scotia, 9% federal plus a 1.5% provincial rate for 2026in Prince Edward Island, 9% federal plus a 1% provincial rate for 2026in Newfoundland and Labrador, 9% federal plus a 2% provincial rate for 2026).² Earn that profit personally instead and federal tax alone reaches 33% once your taxable income passes about $258,000, with your province’s tax on top.³

The low corporate rate only holds while the money stays inside the company. Take it out and you pay personal tax on it as well, and the two layers come to roughly what you’d have paid if the company had simply paid you a salary. So incorporating won’t cut your lifetime tax bill by much. What it does is delay the second layer, so money that would have gone to the CRA this year keeps working in the company until you withdraw it.

We recommend waiting until your annual profit after expenses reliably exceeds what you and your family spend to live on. Call that margin your retained profit, because the whole decision turns on it. Our rough floor is $50,000 a year of it, against roughly $3,000 a year to run a corporation.⁴ Three conditions make incorporating worthwhile whatever your retained profit is: a realistic sale within three to five years, real liability exposure (e.g. employees, a lease, or inventory), or a regulator that requires it. One condition flips the answer the other way: if your company exists mainly so one person can bill a client they’d otherwise be an employee of, the CRA can label it a personal services business, which raises your tax bill rather than lowering it. Our should you incorporate calculator prices both routes, and the corporate tax calculator runs the corporate side.

The number that decides it

Retained profit is annual profit after expenses, minus what your household spends to live on. What the low corporate rate saves you in a year is the difference between that rate and the personal rate you’d have paid on the same profit, and how wide the difference runs depends on where your income sits in your province’s personal brackets, which this page doesn’t set out, so ask us and we’ll run it on your own figures.³

If what’s left over is small, the low corporate rate has almost nothing to work on. You’d still be paying every year for a corporate return, a second set of books and a registry filing, and our own compliance package for that work starts at $3,000 a year.⁴

A common rule suggests incorporating at $100,000 of revenue, but revenue alone doesn’t tell you whether any profit can stay inside the company. An owner with $180,000 of profit after expenses who spends $170,000 has nothing to leave in the company. An owner with $140,000 of profit who lives on $80,000 has $60,000 a year to work with. Our own floor is roughly $50,000 a year retained, sustained for three years or more, and that $3,000 bill doesn’t pause in a bad year.

Personal services businesses

“Personal services business” is a label the CRA applies to your corporation rather than a structure you choose, and it reaches that conclusion on review, often years after the fact. The label applies when five things are true together:

Your services run through a corporation instead of being billed by you personally.
You or a family member own at least 10% of any one type of share the corporation has issued.
The corporation has five or fewer full-time employees throughout the year.
The client paying you isn’t a company that you or your family also control.
Without the corporation in the middle, you’d be an employee of that client.⁵

An ordinary corporation too large for the 9% small business rate still gets a rate cut, taking the top slice of its profit to about 26.5% combined in Ontario for 2026about 27% combined in British Columbia for 2026about 23% combined in Alberta for 2026about 27% combined in Saskatchewan for 2026about 27% combined in Manitoba for 2026about 29% combined in New Brunswick for 2026about 29% combined in Nova Scotia for 2026about 30% combined in Prince Edward Island for 2026about 30% combined in Newfoundland and Labrador for 2026.⁶ A personal services business gets neither break, so it starts from the full 28% federal rate and pays a further 5% of its profit on top, which is 33% of company profit federally before your province’s rate. It can also deduct almost nothing beyond your own salary, so the business expenses you claimed as a proprietor disappear.⁵

What changes immediately

Three routes for taking money out. What the business earns belongs to the corporation now, and it reaches you as a salary, as a dividend (i.e. a payment to shareholders out of profit the company has already paid tax on), or as a loan. Move cash to your chequing account without recording it as pay or a dividend and you’ve taken the third route: the company has lent you the money, whether you meant that or not. A shareholder loan has to be repaid within a year of the end of the fiscal year you took it in. If it isn’t, the whole amount is added to your personal income for the year you took it, with interest from that year.⁷
A corporate tax return every year. Your corporation files a T2, its own income tax return, even in a year it earned nothing. Your corporation also picks a fiscal year-end when it’s set up, which doesn’t have to be December 31. The T2 is due six months after year-end, so June 30 for a December 31 year-end. The tax itself is due earlier, two months after year-end. You get three months only if the company claimed the small business rate, was a Canadian-controlled private corporation all year, and its previous year’s taxable income, with any associated companies, stayed within the applicable business limit.⁸
A registry filing that isn’t a tax return, meaning a short annual return confirming your address and your directors, meaning you. Incorporating federally costs $200 online plus $12 a year for that return. Most owners instead incorporate under their province’s own legislation, which costs a different amount in every province, and missing that annual return is how dormant companies get dissolved.⁹
New CRA account numbers. Incorporating is a change of legal status, so your business number (i.e. the nine-digit CRA account number you were given if you ever registered for GST/HST or payroll as a proprietor) is closed, and the corporation is issued its own, so your GST/HST and payroll registrations don’t carry over. You can make $30,000 of sales across four consecutive calendar quarters before you have to charge GST/HST, but don’t count on the corporation getting a fresh $30,000, because the CRA can count your proprietorship’s sales too.¹⁰
Machinery for paying yourself. Salary means opening a payroll account and withholding income tax and Canada Pension Plan contributions from your own pay. Dividends skip payroll but need a written directors’ resolution, and both routes report to the CRA on a slip with its own late-February deadline.¹¹

Reasons to incorporate early

Three situations justify incorporating before you hit that floor, and each has a cost.

A plausible sale. The lifetime capital gains exemption shelters up to $1,275,000 of gain on a 2026 sale of shares in a qualifying corporation, broadly a Canadian-controlled private corporation whose assets are mostly used in an active business in Canada, held for at least 24 months.¹² A sole proprietorship has no shares to sell. The cost is paying $3,000 or more a year through the years when the deferral is worth little.
Real liability, once you have employees, a lease, inventory or work that could injure someone. Incorporating gives you limited liability, meaning creditors can normally claim the company’s assets rather than your house or savings. Limited liability has holes, though: it doesn’t cover debts you personally guaranteed, which a bank or a landlord will almost always require, your own negligence, or payroll deductions and GST/HST the company collected and never sent to the CRA.
A client or a professional regulator that insists on a corporation. If a client is the one insisting, that’s exactly the pattern CRA reviewers look for, so incorporate if you must to win the work, but run the five conditions above first and price in the higher rate if they apply.

Staying a sole proprietor buys a single tax return, no corporate filings, and losses you can subtract from your other personal income the same year, whereas a corporation’s losses stay with the corporation rather than offsetting your personal income.

How often this changes

Re-run this decision once a year, a couple of months before your year-end, because profit minus what you spend moves quietly. Re-run it early if any of the following happens:

Your profit starts reliably exceeding what you spend, which can happen with no change in revenue at all (e.g. a mortgage gets paid off, or your spouse starts earning).
You go from several clients to essentially one, working their hours with their equipment, or the other way, from one dominant client back to several.
You’ll be applying for a mortgage within two years, since lenders read the income on your personal tax slips rather than profit sitting inside your company, so paying yourself very little shrinks what you qualify for.

Closing thoughts

Incorporation can be reversed, though winding up a company takes planning, final returns and fees even when there’s little left inside it. Waiting another year costs you nothing beyond a later start on the 24-month clock for the capital gains exemption. Far more common than a missed opportunity is a corporation set up on a revenue milestone, with no retained profit to work on and a $3,000 bill anyway. The number that matters is what’s left after you’ve paid yourself and allowed for the tax on that money.

How we handle it

We run the arithmetic on your figures before you incorporate rather than after: last year’s profit, what your household spent, and your province. If incorporating is the answer, we handle the CRA registrations, the new GST/HST and payroll accounts, and the first T2. The same person prepares your personal return, so the corporate and personal sides get planned together. If incorporating isn’t the answer yet, we’ll tell you what to watch for.

The federal rate is 9% on the first $500,000 of active business income for a Canadian-controlled private corporation claiming the small business deduction. That deduction is the break dropping the rate below the general one, and the 9% assumes it is actually available. A corporation earning significant investment income can lose part of it. Sources: Canada Revenue Agency, “Corporation tax rates”, and CRA Guide T4012, T2 Corporation Income Tax Guide, Chapter 4. Both verified 2026-08-09. We keep this figure current in our guide to what changed for 2026. ↩
For Ontario: Ontario Ministry of Finance, Corporations Tax: Corporate Income Tax (ontario.ca), corroborated by 2026 Ontario Budget - Annex: Details of Tax Measures (budget.ontario.ca/2026/annex.html) and Bill 97 status page (ola.org). Verified 2026-08-13. The rate reduction is prorated for taxation years straddling July 1, 2026 (Ontario 2026 Budget annex: 'The tax rate reduction would be prorated for taxation years straddling July 1, 2026.'). Enacted by Bill 97, Plan to Protect Ontario Act (Budget Measures), 2026, S.O. 2026, c. 2, which amends s. 31(4) of the Taxation Act, 2007 so the small business deduction rate is 9.3% for days in a taxation year after June 30, 2026 (11.5% general rate minus 9.3% = 2.2%). The combined 11.7% adds the federal 9% small business rate to the Ontario lower rate and is our arithmetic.For British Columbia: Province of British Columbia (Ministry of Finance), Corporate income tax rates – Province of British Columbia. Verified 2026-08-13. Rate of 2% effective April 1, 2017, and a business limit of $500,000 effective January 1, 2010. Budget 2026 (tabled February 17, 2026) announced no corporate income tax rate changes. The combined 11% adds the federal 9% small business rate to the British Columbia lower rate and is our arithmetic.For Alberta: Government of Alberta - Treasury Board and Finance / Tax and Revenue Administration, Tax, levy, and prescribed interest rates. Verified 2026-08-13. The current-rates table on the issuer page lists 2% with effective date July 1, 2020 (the rate has been 2% since 2017, and July 1, 2020 is the current table row). Alberta Budget 2026 (tabled 2026-02-26) made no corporate rate changes. The issuer rate table loaded 2026-08-13 shows no pending 2026 change. The combined 11% adds the federal 9% small business rate to the Alberta lower rate and is our arithmetic.For Saskatchewan: The Income Tax Act, 2000, c I-2.01 (Saskatchewan), King's Printer consolidation, The Income Tax Act, 2000, s. 56(2) - Rates of tax. Verified 2026-08-13. Rate history in s. 56(2): 2% to Sept 30 2020, then 0% Oct 1 2020 - Jun 30 2023, then 1% from Jul 1 2023 with no end date. The 2026-27 budget (tabled March 18, 2026) makes no change: budget.saskatchewan.ca/economy states the budget is "maintaining the small business tax rate at one per cent". The combined 10% adds the federal 9% small business rate to the Saskatchewan lower rate and is our arithmetic.For Manitoba: Manitoba Finance, Corporate Income Taxes - Province of Manitoba. Verified 2026-08-13. Budget 2026 (tabled March 24, 2026, Information Bulletin 126) announced no corporate income tax rate changes, so 0% holds for all of 2026. The combined 9% adds the federal 9% small business rate to the Manitoba lower rate and is our arithmetic.For New Brunswick: New Brunswick Income Tax Act, S.N.B. 2000, c. N-6.001 (official consolidation, laws.gnb.ca), corroborated by NB Department of Finance and Treasury Board corporate tax page, New Brunswick Income Tax Act (consolidated), s.57(1)(a) and s.57(1.025). Verified 2026-08-13. The combined 11.5% adds the federal 9% small business rate to the New Brunswick lower rate and is our arithmetic.For Nova Scotia: Nova Scotia Department of Finance and Treasury Board (novascotia.ca), Corporate income tax rates - Government of Nova Scotia. Verified 2026-08-13. The cut from 2.5% to 1.5% is applied on a days-prorated basis for taxation years straddling April 1, 2025 (NS Income Tax Act s. 40(2) formula, and CRA Schedule 346 Part 3 prorates 2.5% for days before April 1, 2025 and 1.5% after March 31, 2025). Budget 2026-27 (novascotia.ca/budget) keeps the rate at 1.5% - no 2026 change. The combined 10.5% adds the federal 9% small business rate to the Nova Scotia lower rate and is our arithmetic.For Prince Edward Island: PEI Department of Finance and Affordability, and the Income Tax Act, R.S.P.E.I. 1988, Cap. I-1, Provincial Corporate Income Taxes | Government of Prince Edward Island. Verified 2026-08-13. The 1% rate has applied since January 1, 2022 and was left unchanged by the July 1, 2025 package (which changed the general rate and threshold) and by Budget 2026. Statutory basis: Income Tax Act (PEI) s. 37.11.6 (years beginning on or after 2022-01-01 and ending before 2025-07-01) and s. 37.11.7 (years beginning on or after 2025-07-01), factor A = 1.0% in both. The combined 10% adds the federal 9% small business rate to the Prince Edward Island lower rate and is our arithmetic.For Newfoundland and Labrador: Income Tax Act, 2000, SNL 2000 c I-1.1, s. 40(3) (as amended by 2026 c14 s4), announced in Government of Newfoundland and Labrador Budget 2026, Income Tax Act, 2000 (consolidated), House of Assembly of Newfoundland and Labrador, and the Budget 2026 News Release. Verified 2026-08-13. Announced in Budget 2026 (tabled April 29, 2026) retroactive to January 1, 2026, and already enacted: the consolidated statute's s. 40(3) reads 2% with amendment citation 2026 c14 s4. Section 40(4) prorates straddle years by days: 2.5% for days before January 1, 2026 and 2% for days after December 31, 2025. Budget 2026 also announced further cuts to 1.5% on January 1, 2027 and 1% on January 1, 2028, but those steps are NOT yet in the consolidated statute (no 1.5%/1% text found). The Finance department's Corporate Income Tax web page still showed 2.5% when loaded on 2026-08-13 - that page lags the statute. The combined 11% adds the federal 9% small business rate to the Newfoundland and Labrador lower rate and is our arithmetic. ↩
For 2026 the federal personal rate reaches 33% on taxable income above $258,482. Source: Canada Revenue Agency, “Current year tax rates and income brackets” for 2026, verified 2026-08-09. Provincial personal rates, and the surtax some provinces charge on their own tax rather than on your income, are not stated here, so no combined top personal rate appears anywhere on this page. Provincial personal rates sit outside the verified dataset the corporate figures on this page render from, and a combined figure built by hand would go stale silently. ↩ ↩²
Our Business Tax Compliance package starts at $3,000 a year and covers the corporate return, the owner’s personal return and the year-end work. Provincial registry fees and bookkeeping sit outside it. Our pricing page sets out what each package includes, current 2026-08-09. ↩ ↩²
The definition of a personal services business sits in the Income Tax Act, subsection 125(7), including the five-or-fewer full-time employees condition and the requirement that the payer not be an associated corporation. Note that “associated” (section 256) is a different and narrower test than “related” (section 251). The 10% shareholding condition is the “specified shareholder” definition in subsection 248(1), which reads “not less than 10% of the issued shares of any class”. A personal services business is denied both the small business deduction and the general rate reduction, leaving the 38% basic federal rate less the 10% federal abatement, which is 28%. It also pays an additional 5% federal tax under section 123.5, with deductions limited broadly to the incorporated employee’s salary and benefits. Sources: Income Tax Act, and Canada Revenue Agency, “Corporation tax rates”. Both verified 2026-08-09. ↩ ↩²
For Ontario: Ontario Ministry of Finance, Corporations Tax: Corporate Income Tax (ontario.ca), confirmed in 2026 Ontario Budget - Annex. Verified 2026-08-13. The combined figure adds the federal 15% general rate (after the abatement and general rate reduction) and is our arithmetic.For British Columbia: Province of British Columbia (Ministry of Finance), Corporate income tax rates – Province of British Columbia. Verified 2026-08-13. 12% effective January 1, 2018. Budget 2026 announced no corporate rate changes. The combined figure adds the federal 15% general rate (after the abatement and general rate reduction) and is our arithmetic.For Alberta: Government of Alberta - Treasury Board and Finance / Tax and Revenue Administration, Tax, levy, and prescribed interest rates. Verified 2026-08-13. 8% effective July 1, 2020 (Job Creation Tax Cut endpoint). Alberta Budget 2026 (tabled 2026-02-26) made no change. The issuer rate table loaded 2026-08-13 shows 8% as current with nothing pending. The combined figure adds the federal 15% general rate (after the abatement and general rate reduction) and is our arithmetic.For Saskatchewan: The Income Tax Act, 2000, c I-2.01 (Saskatchewan), King's Printer consolidation, The Income Tax Act, 2000, s. 56(1) - Rates of tax. Verified 2026-08-13. No change in the 2026-27 budget (tabled March 18, 2026). The combined figure adds the federal 15% general rate (after the abatement and general rate reduction) and is our arithmetic.For Manitoba: Manitoba Finance, Corporate Income Taxes - Province of Manitoba. Verified 2026-08-13. Budget 2026 (March 24, 2026) made no change to the general rate. The combined figure adds the federal 15% general rate (after the abatement and general rate reduction) and is our arithmetic.For New Brunswick: New Brunswick Income Tax Act, S.N.B. 2000, c. N-6.001 (official consolidation, laws.gnb.ca), New Brunswick Income Tax Act (consolidated), s.56(4.32) and s.57(1.07). Verified 2026-08-13. The combined figure adds the federal 15% general rate (after the abatement and general rate reduction) and is our arithmetic.For Nova Scotia: Nova Scotia Department of Finance and Treasury Board (novascotia.ca), Corporate income tax rates - Government of Nova Scotia. Verified 2026-08-13. 14% since April 1, 2020 (was 16% before). Budget 2026-27 proposes no change to corporate income tax rates. The combined figure adds the federal 15% general rate (after the abatement and general rate reduction) and is our arithmetic.For Prince Edward Island: PEI Department of Finance and Affordability, and the Income Tax Act, R.S.P.E.I. 1988, Cap. I-1, s. 37(1), Provincial Corporate Income Taxes | Government of Prince Edward Island. Verified 2026-08-13. Reduced from 16% by the 2025-26 budget, effective July 1, 2025. Straddling taxation years are split into notional years at June 30/July 1, 2025 with income apportioned by days (Income Tax Act (PEI) s. 37.11.7(4)). CRA applies day-based proration for dual-rate years. Budget 2026 (tabled April 14, 2026) made no further change. The combined figure adds the federal 15% general rate (after the abatement and general rate reduction) and is our arithmetic.For Newfoundland and Labrador: Income Tax Act, 2000, SNL 2000 c I-1.1, s. 40(1), Income Tax Act, 2000 (consolidated), House of Assembly of Newfoundland and Labrador. Verified 2026-08-13. The combined figure adds the federal 15% general rate (after the abatement and general rate reduction) and is our arithmetic. ↩
A loan from a corporation to its shareholder is included in the shareholder’s income for the year the loan was received. The exception is a loan repaid within one year after the end of the corporation’s taxation year in which it was made. Sources: Income Tax Act, subsections 15(2) and 15(2.6), verified 2026-08-09. A separate deemed interest benefit under section 80.4 can also apply and is not covered here. ↩
The T2 is due six months after the tax year-end, and the balance of tax is due two months after year-end. The three-month balance-due day applies only where an amount was deducted under section 125 in the current or preceding year, the corporation was a Canadian-controlled private corporation throughout the year, and its taxable income for the preceding year, together with that of any associated corporations, did not exceed the business limit. Sources: Income Tax Act, subsection 248(1), definition “balance-due day”, paragraph (d)(i), and Canada Revenue Agency, “When to file your corporation income tax return”. Both verified 2026-08-09. ↩
Corporations Canada charges $200 to incorporate a federal business corporation online and $12 for the federal annual return. Source: Corporations Canada, “Services, fees and processing times”, verified 2026-08-09. Provincial and territorial incorporation fees differ and are not stated here. ↩
The GST/HST small supplier threshold is $30,000 of taxable supplies over four or fewer consecutive calendar quarters, or in a single quarter. Source: Canada Revenue Agency, “When to register for and start charging the GST/HST”, verified 2026-08-09. The association tests that can pull a controlled corporation’s sales together with the individual’s own are in subsections 148(1) and 127(2) of the Excise Tax Act. If you were already charging GST/HST as a proprietor, the cautious course is for the corporation to charge it from its first invoice. ↩
Salary is reported on a T4 slip and dividends on a T5 slip. Both are due by the last day of February following the calendar year they cover, and for the 2026 calendar year that date falls on a weekend, so the deadline moves to Monday, March 1, 2027. Sources: Income Tax Regulations, subsection 205(1), and Canada Revenue Agency, “Filing information returns”. Both verified 2026-08-09. How much salary against how much dividend is a separate decision this article does not cover. ↩
The lifetime capital gains exemption is $1,275,000 for 2026 dispositions of qualified small business corporation shares, subject to the 24-month share-holding and active-asset conditions. Sources: Canada Revenue Agency, “Indexation adjustment for personal income tax and benefit amounts”, and CRA Guide T4037, Capital Gains. Both verified 2026-08-09. We state this figure in full in our lifetime capital gains exemption primer. ↩

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