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.

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.

Tax rates vary from province to province and can change from year to year.

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.

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:

Income splitting can reduce a family’s overall tax burden if structured properly and within legal limits.

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.

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.

A corporation can be used to build retirement savings in a more tax-efficient way:

These strategies can complement your RRSP and TFSA to build long-term wealth.

Having a professional corporation can:

A professional corporation allows business owners to structure compensation flexibly, including:

This can help with personal and family tax planning, investment strategies, and debt management.

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.

Incorporation isn’t just a legal structure—it’s a powerful financial tool. For business owners with stable businesses, and higher incomes, it can unlock major advantages in tax planning, retirement savings, and asset protection.