Before incorporating, compare expected income and costs, personal cash needs, contract facts and the ongoing work of running a corporation. Teplov CPA can review the options and identify setup work within an agreed scope.
Most contractors who are weighing incorporation arrive with one of these as the starting point.
Incorporation is not a yes or no question. It is a set of factors that interact with each other and with your specific contract and income situation.
Funds available to retain
The core question is whether funds can remain in the corporation after personal withdrawals, tax reserves and operating needs. Potential deferral depends on the amount retained and how long it remains there; no single revenue threshold answers this.
Small business deduction
An eligible Canadian-controlled private corporation may claim the federal small business deduction on qualifying active business income, subject to its available business limit (generally $500,000 federally, but the limit can be reduced). Provincial rules vary. Compare the eventual corporate and personal taxes, not just the first-year corporate rate.
PSB risk after incorporation
Incorporation does not eliminate personal services business risk. If your corporation provides services through a staffing agency to a single client and the facts suggest an employer-employee relationship, CRA can still apply PSB rules to the corporation. The structure of the arrangement matters more than the legal form.
Fiscal year election
A new corporation can generally choose a fiscal year-end, including December 31, on its first T2 return. Its first tax year cannot exceed 53 weeks; some corporations have special restrictions. The choice affects filing and payment dates and should fit the business and owner planning.
Province of incorporation
Most IT contractors incorporate provincially in their home province, which is simpler and cheaper to maintain than federal incorporation. Federal incorporation is useful if you operate across multiple provinces or want name protection nationally. Either route requires registration in the province where you operate.
Transition from sole proprietorship
Incorporating mid-year creates two tax periods: the sole proprietorship period and the corporate period. The timing matters for GST/HST registration, final T2125 reporting, bookkeeping continuity, and instalment obligations. Starting a corporation at the beginning of a new contract is usually simpler than converting mid-file.
The federal corporate tax rate for CCPCs on income eligible for the small business deduction is published by CRA at canada.ca/corporation-tax-rates. Federal incorporation is available through Corporations Canada. Provincial incorporation in Ontario is handled through the Ontario Business Registry.
Three areas that need to be reviewed before and after the incorporation decision: whether to incorporate, how to set up the new entity, and how to manage the transition.
A qualifying corporation may defer some personal tax when after-tax business income remains inside it. The result depends on eligibility for the small business deduction, the province, corporate costs and how and when the owner withdraws funds. Later salary or dividends can create personal tax.
Retained funds can be reinvested or held for later needs, with their own tax consequences. If most corporate cash must be paid out for personal expenses, the available deferral may be limited. The structure also adds T2 filings, potentially payroll and GST/HST registrations for the new entity, and separate records for owner transactions.
The right question is not whether incorporation saves tax in theory. It is whether your income level and personal spending leave enough in the corporation to make the deferral meaningful at this stage of your contracting career.
Detailed breakdowns of the decisions that come before and after incorporation.
The tax math, admin cost, PSB risk, and cash-flow factors that determine whether incorporation makes sense for IT contractors.
→How Canadian IT contractors should compare sole proprietorship and incorporation for tax, admin cost, PSB risk, and cash flow.
→How incorporated Canadian IT contractors should compare salary and dividends for tax, CPP, RRSP room, cash flow, and corporate planning.
→What a personal services business determination means, how CRA assesses it, and the tax and expense consequences for incorporated contractors.
→The $30,000 threshold, voluntary registration, input tax credits, and retroactive liability risk for IT contractors.
→Share anticipated revenue and costs, personal withdrawals, province, proposed contract and current business structure. The initial enquiry starts a discussion; scope and fees are confirmed through the engagement process.
