When to
incorporate.
The single decision that gates more than two thirds of the Canadian funding landscape. There is no wrong answer here, only an expensive one if you wait too long or rush in.
The tax math
is simpler than people think.
A Canadian-Controlled Private Corporation (CCPC) pays approximately 9 to 12.5 percent federal tax on the first $500,000 of active business income, plus a provincial layer that varies between 0 and 5 percent. Total combined small business rate: roughly 9 to 17 percent depending on the province.
A sole proprietor pays personal tax on all business income. Once your business income plus other income passes about $55,000, your marginal rate exceeds the small business corporate rate. Past $75,000 the gap becomes large. Past $235,000 you are taxed at over twice the corporate rate.
This is the easy math. The catch: when you draw money out of a corporation via dividends or salary, the personal tax kicks in. The benefit is the difference between paying tax now (sole prop) and being able to defer tax indefinitely on profits reinvested in the business (corporation). For founders compounding into the business, that deferral compounds.
Past $75,000 of business income, you are paying personal tax twice on every dollar you reinvest.
The funding math
is where the real gap is.
The Small Business Deduction, the Lifetime Capital Gains Exemption, NRC IRAP, Strategic Innovation Fund, every provincial R&D credit, every interactive digital media credit, every clean technology investment credit. All of these require you to be incorporated.
Roughly two thirds of Deductly's database is closed to sole proprietors. The remaining third is mostly home-office and vehicle deductions, GST input credits, and a few small grants. Useful but not the game.
If you plan to apply for any federal grant larger than $25,000, you should be incorporated. Most grant programs explicitly require a corporation as a precondition.
$200 to $400 in fees plus 1 to 3 hours of paperwork (federal) or a few hundred more for provincial. Optional: $500 to $1500 for an accountant to do it right.
$800 to $2500 per year for a basic T2 corporate return. Bookkeeping if you do not do it yourself: another $1000 to $3000.
When to delay
is rare but real.
There are three situations where staying a sole proprietor is correct: (1) you are running a true side business that will never grow, (2) you expect business losses for the first 1 to 2 years and want to offset them against personal income (a corporation cannot do this), (3) you have no plans to raise capital, hire, or sell.
Most founders fit none of these. If you find yourself in case 2 specifically, talk to an accountant before incorporating. The losses can be valuable.