Why your business structure matters
Sole proprietors and corporations face different tax filing and administrative requirements. Choosing the right setup depends on profitability, cash needs, legal considerations and long-term plans.
What is the difference between personal and corporate tax?
A sole proprietor generally reports net business income on their personal income tax return, where it is subject to progressive personal income tax rates. A corporation files a separate T2 corporate return and pays corporate income tax on taxable profits. Shareholders can face additional personal tax when money is paid out as salary or dividends.
What tax rate does an Ontario corporation pay?
The federal small business rate is generally 9% on qualifying active business income eligible for the small business deduction. Ontario’s small business rate is 2.2% from July 1, 2026, meaning a combined rate of 11.2% for qualifying income earned in periods to which those rates apply. Taxation of a corporation’s year may involve prorating where rates change mid-year. Eligibility for the deduction, associated corporations, passive investment income and other rules can reduce the available business limit. The federal business limit is generally $500,000, subject to applicable reductions.
Should every business incorporate?
No. Incorporation can provide opportunities to defer personal tax when profits can remain in the company, but money withdrawn personally may trigger additional tax. Annual corporate returns, bookkeeping, legal filings and professional fees add cost. A sole proprietorship may be appropriate for a new or smaller operation.
What other obligations matter?
- GST/HST: Most businesses must register when they exceed the $30,000 small-supplier threshold in a single calendar quarter or over four consecutive calendar quarters, subject to the applicable CRA rules and exceptions.
- Payroll: Employers generally must withhold and remit income tax, CPP contributions and EI premiums when required.
- Bookkeeping: Accurate records support tax filings, deductions and audit readiness.
The bottom line
Tax-efficient planning considers both the corporation and its owners. Review your options with a qualified adviser. Explore our incorporation, corporate tax and small business tax services.