How Personal Tax Works in Canada
As an individual (or sole proprietor), you report all income on your personal T1 return. Canada uses a progressive tax system — you pay higher rates on higher income.
2024 Federal Tax Brackets
| Taxable Income | Federal Rate |
|---|---|
| Up to $55,867 | 15% |
| $55,867 – $111,733 | 20.5% |
| $111,733 – $154,906 | 26% |
| $154,906 – $220,000 | 29% |
| Over $220,000 | 33% |
Ontario adds its own provincial brackets, bringing the combined top marginal rate to about 53.53% on income over $220,000.
How Corporate Tax Works
When you incorporate, your business becomes a separate legal entity that files its own tax return (T2). Corporate tax rates are significantly lower than personal rates — but the money still gets taxed again when you pay it out.
| Type | Federal | Ontario | Combined |
|---|---|---|---|
| Small business (first $500K of active income) | 9% | 3.2% | 12.2% |
| General corporate rate (above $500K) | 15% | 11.5% | 26.5% |
Paying Yourself: Salary vs. Dividends
As a corporation owner, you choose how to pay yourself:
Salary
- • Deductible expense for the corporation
- • Creates RRSP contribution room
- • Requires payroll (CPP, source deductions)
- • Contributes to CPP pension
Dividends
- • Paid from after-tax corporate profits
- • No CPP contributions required
- • Does not create RRSP room
- • Taxed at dividend tax credit rates
Most business owners use a mix of both. The optimal split depends on your income level, family situation, and retirement plans — exactly the kind of decision a qualified CPA can help you make.
When Does Incorporation Make Sense?
Incorporation isn’t right for everyone. Generally, it starts making financial sense when:
- ✓Your business earns more than you need to live on — you can leave profits in the corporation at the low 12.2% rate and defer personal tax.
- ✓You need liability protection — a corporation is a separate legal entity, shielding your personal assets from business debts.
- ✓You want to income-split with family members through dividends (subject to TOSI rules).
- ✓You plan to sell the business and want to access the Lifetime Capital Gains Exemption ($1,016,836 in 2024).
When It May Not Be Worth It
- ✗You spend all your business income on personal expenses — no tax deferral advantage.
- ✗Your annual revenue is under $50K — the added accounting costs ($1,500–$3,000/yr) may outweigh the savings.
- ✗You value simplicity — sole proprietorships are much easier to manage and file.
Common Business Structures at a Glance
| Sole Proprietor | Corporation | |
|---|---|---|
| Tax return | T1 (personal) | T2 (corporate) + T1 (personal) |
| Tax rate on first $500K | Personal rates (up to ~53.53%) | 12.2% (corporate) + personal on payout |
| Liability | Unlimited personal liability | Limited to corporate assets |
| Setup cost | $0–$60 (registration) | $1,000–$2,500 (legal + accounting) |
| Annual accounting cost | $200–$400 (T1 with T2125) | $1,500–$3,000+ (T2 + financials) |
| Best for | Freelancers, low revenue, simplicity | Growing businesses, tax deferral, liability protection |
The Role of Your Accountant
Tax planning is not a DIY project. A qualified CPA can:
- • Model whether incorporation saves you money based on your actual numbers
- • Optimize your salary-dividend mix each year
- • Set up holding companies or family trusts when appropriate
- • Ensure compliance with TOSI (Tax on Split Income) rules
- • Plan for the Lifetime Capital Gains Exemption on eventual business sale
Talk to a CPA About Your Tax Structure
The right structure can save you thousands per year. Find a CPA in Ontario who specializes in tax planning and business advisory.