I'm self-employed and doing well. Should I incorporate to save tax?

Incorporating doesn't automatically mean paying less tax — it depends on what you do with the profit. Here's how to think about it:

1. Understand the real benefit: deferral, not exemption. A Canadian-Controlled Private Corporation (CCPC) pays about 11–12% combined federal + Ontario tax on the first $500,000 of active business income (the small business deduction: 9% federal; Ontario's provincial portion dropped from 3.2% to 2.2% on July 1, 2026). But that low rate only applies to profit you leave inside the corporation. The moment you take it out as salary or dividends, personal tax applies.
2. Compare with staying sole proprietor. As a sole proprietor, all profit is taxed personally in the year you earn it — up to about 53.5% at Ontario's top marginal rate. If you need every dollar to live on, incorporating saves you nothing.
3. Incorporate when the numbers justify it. It usually makes sense when your profit is well above what you need personally, you want liability protection, or you're building something you may one day sell.
4. Count the costs. Incorporation fees, an annual T2 return, bookkeeping, and a minute book — budget a few thousand dollars a year in compliance costs.
5. Don't incorporate just for "write-offs." A sole proprietor deducts the same business expenses a corporation does. The expense rules don't change — the tax rate on retained profit does.

	Sole proprietor	Corporation (CCPC)
Tax on $100K profit you keep in the business	Taxed personally now (marginal rate)	~11–12% combined (Ontario, 2026)
Tax on money you take home	Same personal tax	Personal tax on salary/dividends
Liability	Unlimited personal liability	Limited liability (separate legal entity)
Annual compliance cost	Minimal (T1 + business schedules)	T2 return + bookkeeping + minute book

Should I pay myself a salary or dividends from my corporation?

Canada's tax system is designed so the combined corporate + personal tax ends up roughly similar either way (that's called integration). So the decision is less about tax and more about what each option gives you:

1. Salary: deductible and benefit-building. Salary is a deductible expense for the corporation. It creates RRSP contribution room (18% of earned income, up to $33,810 for 2026), builds CPP entitlement, and gives you a T4 that mortgage lenders love.
2. Salary: the CPP cost. You pay both the employee and employer halves of CPP — about 11.9% combined on pensionable earnings — plus payroll setup and remittances.
3. Dividends: simple and flexible. No CPP, no payroll administration, and you can time them when it suits you. The dividend tax credit compensates for corporate tax already paid.
4. Dividends: the trade-offs. Dividends are not deductible to the corporation, create zero RRSP room, build no CPP, and produce a T5 that lenders take less seriously than a T4.
5. The common answer: a mix. Many owners take enough salary to build RRSP room and CPP, then top up with dividends. Document every dividend with a directors' resolution, and file T4/T5 slips on time.

	Salary (T4)	Dividends (T5)
Deductible to the corporation	Yes	No
CPP	Yes — both halves (~11.9%)	None
RRSP room created	Yes — 18%, up to $33,810 (2026)	None
Payroll admin	Required	Not required
Mortgage qualification	Strong (T4 income)	Weaker (T5 income)

What expenses can my small corporation actually deduct?

The rule is simple: you can deduct reasonable expenses incurred to earn business income. The most commonly claimed ones:

1. People costs — salaries, wages, and subcontractor fees.
2. Premises — office or shop rent, utilities, business insurance.
3. Vehicle — only the business-use percentage (business km ÷ total km), backed by a logbook.
4. Home office — a reasonable portion of rent, utilities, and maintenance if you work from home regularly.
5. Meals and entertainment — only 50% deductible, with receipts and the business reason noted.
6. Professional and financial — accounting and legal fees, bank charges, advertising, and CCA (depreciation) on equipment.
7. Keep proof. Receipts plus a note of the business purpose. CRA regularly denies vehicle and meal claims with no records.
8. Know what's never deductible — personal meals, commuting from home to your regular workplace, fines and penalties, and personal clothing.

Deductible	Not deductible
Client dinner (50%)	Your own lunch (0%)
Business km with logbook	Home-to-office commuting
Home office (work-use %)	Full rent claimed as "office"
Accounting/legal fees	CRA fines and penalties
Equipment (via CCA over time)	Personal car, personal phone portion

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Do I need a holding company?

A holding company ("Holdco") is a separate corporation that owns shares of your operating company and/or holds investments. It's a structure some owners use — but it's not for everyone:

1. What it's used for. Common reasons: creditor protection (investments sit outside the operating company's risk), holding passive investments separately, and estate/succession planning (such as an estate freeze).
2. The tax angle. Dividends can generally flow between the corporations tax-free, and each person may access their own Lifetime Capital Gains Exemption (up to $1.25 million on qualifying small business shares) on a future sale — but only if the shares stay "pure" enough to qualify.
3. The cost. A second corporation means a second T2 return every year, intercompany bookkeeping, and legal setup costs. Budget for ongoing compliance, not just day one.
4. When it's usually overkill. One small operating company, modest retained earnings, no significant assets at risk — a Holdco adds paperwork without payoff.
5. Get advice before building one. The setup (share structure, elections like the 85(1) rollover) is legal + tax work that has to be done right the first time. This page is educational — talk to your accountant and lawyer about your situation.

Holding company may make sense	Probably overkill
Significant retained earnings or investments to protect	One small operating company, modest profits
Real creditor/liability exposure in the operating business	No meaningful assets at risk
Succession or estate planning on the horizon	No succession plans
Budget for two T2s + legal maintenance yearly	Want the simplest possible structure

I took money out of my corporation as a loan. What's the tax risk?

This is one of the most expensive mistakes small corporations make. Under subsection 15(2) of the Income Tax Act:

1. The one-year rule. A loan from your corporation must generally be repaid within one year after the end of the corporation's tax year in which the loan was made. Miss that deadline and the full loan amount is taxed as your personal income — in the year you borrowed it, not the year you missed repayment.
2. Example. Your corporation's year-end is December 31. You borrow $40,000 in June 2025. Repay it by December 31, 2026 or the $40,000 lands on your 2025 personal return.
3. Fake repayments don't work. Repaying just before the deadline and re-borrowing right after is a "series of loans" — CRA sees through it and denies the exception. Repayment needs real money movement with bank records.
4. Interest-free isn't free either. Low or no-interest shareholder loans can trigger a deemed interest benefit under subsection 80.4 — extra taxable income even when 15(2) doesn't apply.
5. The clean alternatives. Pay yourself properly: salary (deductible, needs payroll) or dividends (needs a directors' resolution and T5 slip). If it's genuinely a loan, put a real loan agreement with a real repayment schedule in writing.

Clean ways to take money out	The trap
Salary via payroll (T4)	Undocumented "loan" with no repayment
Dividends with directors' resolution (T5)	Repay-then-reborrow around the deadline
Bona fide loan, written terms, real repayments	Interest-free loan with no paperwork

My corporation had no activity this year. Do I still have to file a T2?

Yes. Every resident corporation must file a T2 return every year, even with zero income and zero activity. Here's the checklist:

1. File even when dormant. "No activity" doesn't mean "no return." CRA requires the T2 regardless — inactive corporations included.
2. Know your deadline. The T2 is due 6 months after your fiscal year-end (e.g., December 31 year-end → June 30). Any balance owing is due earlier: 2 months after year-end (3 months for eligible small CCPCs).
3. E-file — paper costs $1,000. Electronic filing is mandatory for tax years starting after 2023. Filing on paper without an exemption triggers a $1,000 non-compliance penalty.
4. Use the T2 Short Return if you qualify. Eligible inactive CCPCs can file the simplified short return: CCPC all year, $0 net income or a loss, permanent establishment in only one province, no refundable credits claimed, no taxable dividends paid or received.
5. Late penalties are real. 5% of unpaid tax plus 1% per complete month late (up to 12 months) — and interest compounds daily on top.
6. Done with the corporation? Dissolve it properly — but a final T2 for the wind-up year is still required.

Situation	What to file
Active corporation	Full T2 + GIFI schedules (100, 125, 141)
Inactive, eligible CCPC	T2 Short Return
Had income/expenses but net $0	Full T2 (report everything — losses carry forward)
Shutting down	Final T2 for the wind-up year, then dissolve

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Official CRA links

– Corporation tax rates: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/corporation-tax-rates.html

– T2 Corporation Income Tax Guide (T4012): https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4012/t2-corporation-income-tax-guide-before-you-start.html