Corporation vs. Sole Proprietorship: Which One Really Saves Your More on Taxes in Ontario?
If you are running a business in Ontario, or thinking about starting one, you’ve probably wondered: Should I stay a sole proprietor or take a leap and incorporate? The answer can have a big impact on your taxes, your liability, and your long-term financial strategy.
What is a Sole Proprietorship?
A Sole Proprietorship (“SP”) is the simplest, most common business structure in Canada. There is no legal separation between you and your business, meaning you are the business.
You can operate under your own name or register a business name. For example, John Doe can invoice clients as “John Doe” or register a business name like “JD Services” and use that on all financial documents.
The biggest perk? It is fairly easy and inexpensive to set up.
The biggest drawback? You can be personally liable for everything.
What is a Corporation?
A Corporation is a separate legal entity, think of it as its own “person” for tax and legal purposes. It files its own taxes, earns its own income, and carries its own liabilities. As the owner, you’re not personal on the hook for the business’s profits or losses. Instead, you pay yourself through salary, dividends, or a mix of both.
In Canada, corporations can fall under several categories, including:
- Canadian-controlled private corporation (CCPC)
- Public corporation
- Corporation controlled by a public corporation
Why incorporate? More protection and potential tax savings.
Why hesitate? More cost and paperwork.
Tax Filing Requirements: Sole Proprietor vs Corporations:
Sole Proprietor Tax Rules
Sole proprietors report everything on their personal tax return:
- Income and expenses go on the T2125, or Statement of Business or Professional Activities
- Tax year = January 1 to December 31
- Filing Deadline = June 15, unless taxes are owing (then April 30)
- Income is taxed at regular personal federal and provincial rates
Simple? Yes. But the more you earn, the higher your tax rate climbs.
Corporation Tax Rules
Corporations have their own tax obligations:
- Must file a T2 Corporation Income Tax Return
- The fiscal year can end whenever you choose (ex. September 30)
- Filing deadline = 6 months after the fiscal year-end
- Tax rate starts at 38% federal, but this is reduced through:
- Federal tax abatement
- General rate deductions
- Small business deduction
Plus, once any business passes $30,000 in annual sales, it must register for a GST/HST account and file returns (monthly, quarterly, or annually).
How do Tax Payments Work?
Sole Proprietors are responsible for paying their own income tax. Since no employer deducts tax from their income, they may need to pay in instalments throughout the year if your income is high enough.
On the other hand, corporations pay tax monthly or quarterly, based on their fiscal year. Corporate instalments are predictable and are often easier to plan for than personal instalments.
What Tax Deductions Are Available?
Sole Proprietors can reduce taxable income through common deductions such as:
- Advertising costs
- Office supplies
- Internet and phone
- Vehicle expenses (gas, insurance, registration)
- Legal and accounting fees
- Capital Cost Allowance (CCA) on depreciable assets
Although these help, they are limited by your personal tax bracket.
Similarly, corporations can deduct many of the same expenses plus more:
- Office rent and utilities
- Employee salaries and benefits
- Equipment purchases and repairs
- Business taxes and licences
- And crucially: losses can be carried back 3 years or forward 20 years
This is a major advantage. Losses inside a corporation can strategically reduce taxable income.
(Sole proprietors, by contrast, can only apply business losses to the year they occur.)
Pros & Cons of Incorporation
| Advantages of Incorporation | Disadvantages of Incorporation |
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So … Which One Saves More on Taxes in Ontario?
Generally, if you earn modest income, staying a sole proprietor is often simplest and most cost-effective.
If your business is growing, you want liability protection, or you are earning enough to leave money in the company, incorporation can significantly reduce your taxes and give you more financial flexibility.
***Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.
Elias Zafiridis