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    Should I Incorporate?

    Sole proprietor vs CCPC — tax, deferral, breakeven, and 5-year cost test

    Estimates only – not tax advice. For planning purposes only; does not replace professional advice or official CRA calculations. Full disclaimer

    Last reviewed:

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    Your situation

    2025 tax year. All figures in CAD.

    Amount you need to extract from the business each year.

    Drives deferral value.

    Activates LCGE consideration.

    Sole proprietor

    T2125, personal income tax + full CPP

    Business income$120,000
    Total tax (income + CPP)$35,135
    Net after-tax cash$84,865
    RRSP room generated$21,600
    CPP pensionable earnings$71,300

    CCPC (optimal salary + dividend)

    Extract all profits.

    Salary paid$71,300
    Dividend paid$39,217
    Retained in corp$0
    Corporate tax$5,449
    Personal income tax$19,298
    CPP paid$8,068
    Total tax$32,816
    Net after-tax cash (extracted)$83,150
    RRSP room generated$12,834
    CPP pensionable earnings$71,300

    Headline comparison

    Annual tax saving (CCPC vs sole prop)
    $2,320
    After ~$2,700 extra corp overhead
    -$380
    Breakeven income (ON)
    $127,500
    RRSP room difference (sole − CCPC)
    $8,766
    CPP pensionable diff (sole − CCPC)
    $0

    Recommendation

    At your current income level in Ontario, staying as a sole proprietor is more tax-efficient. Incorporation costs (~$2,500/year in extra accounting) outweigh the tax savings.

    The 5-year test

    "If I incorporate now and wind up in 5 years, was it worth it?"

    5-year cumulative tax saving$11,599
    Less: setup cost (year 1)− $1,500
    Less: 5 years extra accounting + banking− $13,500
    Less: wind-up cost− $1,500
    Net 5-year benefit-$4,901
    Incorporation would cost about $4,901 more than staying sole proprietor over 5 years.

    Breakeven income by province

    The lowest net business income at which CCPC saves money after ~$2,700/year extra accounting + banking.

    Province / territoryBreakeven incomeCombined SBD rate
    Ontario$127,50012.2%
    British Columbiano breakeven < $300k11.0%
    Albertano breakeven < $300k11.0%
    Québec$82,50012.2%
    Saskatchewanno breakeven < $300k10.0%
    Manitobano breakeven < $300k9.0%
    New Brunswickno breakeven < $300k11.5%
    Nova Scotiano breakeven < $300k11.5%
    Prince Edward Islandno breakeven < $300k10.0%
    Newfoundland and Labradorno breakeven < $300k11.5%
    Yukonno breakeven < $300k9.0%
    Northwest Territoriesno breakeven < $300k11.0%
    Nunavutno breakeven < $300k12.0%

    Breakevens are computed from current 2025 federal + provincial rates with full extraction (no reinvestment).

    Personal Services Business (PSB) risk
    If your CCPC primarily serves one client and you would otherwise be their employee, CRA may classify it a Personal Services Business. PSBs lose the Small Business Deduction and most deductions, taxed at ~33%+ federally — wiping out the incorporation advantage entirely.

    Non-tax advantages

    • Limited liability — personal assets shielded from business creditors (with exceptions).
    • LCGE — up to $1,250,000 tax-free on eventual share sale.
    • Health Spending Account — 100% deductible medical expenses through the corp.
    • Fiscal year-end flexibility — choose any date, not locked to Dec 31.
    • Credibility with enterprise / institutional clients.
    • Succession planning — share structure for estate freeze and family transfers.

    Non-tax disadvantages

    • Annual accounting — $2,000-$5,000/year for T2 + T1.
    • Incorporation cost — $1,000-$2,000 plus legal fees.
    • Separate corporate bank account required.
    • Corporate minutes + resolutions, annual meetings, dividend declarations.
    • PSB risk if primarily one client.
    • Wind-up cost if you close ($500-$2,000 + CRA clearance wait).
    • Payroll complexity if paying yourself salary.
    • Passive income trap — $50k threshold reduces SBD.

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