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Incorporation
Why Business Owners Incorporate in Canada
In Canada, many business owners choose to incorporate. While incorporation isn’t right for everyone, it offers a range of financial, tax, and legal benefits that make it a popular choice for business owners, especially those with higher earnings or established practices. Here’s a breakdown of why incorporation is often advantageous for business owners in Canada.
Tax Deferral Opportunities
One of the primary reasons to incorporate is income tax deferral. When you earn income through a corporation, you pay the small business corporate tax rate, which is significantly lower than the top personal tax rate.
%
Small Business Tax Rate
Varies by province
%
Top personal tax rate
By leaving income in the corporation instead of withdrawing it all as salary or dividends, professionals can defer personal taxes and reinvest retained earnings into the business or other investments.
Income Splitting (Where Permitted)
Although the federal government tightened rules on income splitting through Tax on Split Income (TOSI) in 2018, there are still limited opportunities to split income in specific circumstances:
- LWith a spouse or adult child who works meaningfully in the practice
- LIn provinces that allow non-voting shares for family members (rules vary)
- LThrough retirement and estate planning with careful structuring
Income splitting can reduce a family’s overall tax burden if structured properly and within legal limits.
Lifetime Capital Gains Exemption (LCGE)
In certain cases, selling the shares of a professional corporation may allow access to the Lifetime Capital Gains Exemption, which is over $1 million in 2025. While it’s more complex for professional corporations (which typically cannot sell goodwill), tax professionals can sometimes structure the business to take advantage of this exemption.
Limited Liability Protection
Incorporation offers some protection from liability—though not for professional negligence, which is still your personal responsibility. However, a corporation can protect you from certain contractual or business liabilities, such as debts or lease obligations.
Better Retirement Planning
A corporation can be used to build retirement savings in a more tax-efficient way:
- LRetain earnings inside the corporation for investment
- LEstablish an Individual Pension Plan (IPP) or Retirement Compensation Arrangement (RCA)
- LUse corporate-owned life insurance as a planning tool
These strategies can complement your RRSP and TFSA to build long-term wealth.
Business Credibility and Continuity
Having a professional corporation can:
- LImprove credibility with banks, suppliers, and patients
- LMake it easier to bring on partners or associates
- LProvide continuity of the business if the owner passes away or retires
Customization and Flexibility
A professional corporation allows business owners to structure compensation flexibly, including:
Salary
Dividends
Bonuses
Loans from the corporation
within legal limits
This can help with personal and family tax planning, investment strategies, and debt management.
Final Considerations
Before incorporating, it’s essential to consult with a tax advisor and legal professional. Not all business owners benefit from incorporation—especially those with lower earnings, high personal spending needs, or those close to retirement.
Each province also has its own rules governing professional corporations, including naming conventions and ownership restrictions.
In Summary
Incorporation offers some protection from liability—though not for professional negligence, which is still your personal responsibility. However, a corporation can protect you from certain contractual or business liabilities, such as debts or lease obligations.