When to incorporate your Canadian business
The math behind whether incorporation is worth it for your situation, in plain English.
Published February 19, 2025 · 7 min read
Incorporation is a paperwork burden. It also opens up a stack of tax benefits that simply do not exist for sole proprietors. The right question is not whether to incorporate but when. Here is how we think about it.
The break-even point
Incorporation typically becomes financially worth it somewhere between $80,000 and $120,000 of annual business profit. Below that, the cost of running a corporation (annual minute book, T2 filing, separate bank account) eats most of the savings.
Above that, the Small Business Deduction starts paying for the overhead many times over. By $200,000 of profit, the math is overwhelming.
What you get when you incorporate
Access to the Small Business Deduction: 9 percent federal tax versus 15 percent on the first $500K of active income.
Income smoothing: pay yourself a salary or dividends across years to manage personal tax brackets.
Tax deferral: keep retained earnings in the corporation taxed at corporate rates rather than personal rates.
Lifetime Capital Gains Exemption on eventual share sale (up to $1.25M tax-free as of 2026).
Liability protection: separates personal assets from business risk.
What it costs
Initial incorporation: $200 to $1,500 depending on whether you use a service or a lawyer.
Annual maintenance: minute book updates, registered office, annual returns. $500 to $2,000 per year.
Corporate accounting: T2 returns are more involved than T2125 self-employed returns. Plan for $1,500 to $5,000 per year for a basic incorporated SMB.
Signs you should incorporate now
You have hit $80K+ in business profit and expect that to continue or grow.
You are taking on real liability (client contracts, employees, physical product).
You plan to raise outside investment.
You plan to eventually sell the business.
Multiple co-founders need a clean ownership structure.
Signs to stay a sole proprietor for now
You are still validating the business with less than $80K profit.
You have no liability exposure beyond what insurance covers.
You actively want to use business losses against other personal income.
Your business is genuinely temporary or seasonal.
Incorporation is not magic. It is a tool that pays off above a clear threshold. If your business is over $80K of profit and growing, talk to an accountant about timing. If you are below that, focus on growing the business first.