Most tradespeople should start as a sole proprietor and only incorporate once they are consistently earning more than they need to live on. A sole proprietor is taxed personally at marginal rates that reach roughly 45 to 54 percent at higher incomes and carries unlimited personal liability. A corporation is a separate legal person that pays corporate tax at far lower rates, shields your personal assets, but costs more to set up and run. The break-even is commonly cited around $80,000 to $100,000 of net profit a year, and only if you can leave some of that profit inside the company. This is the complete guide to the decision: liability, the small business deduction, tax deferral, the real costs, when to incorporate, and federal versus provincial.
The two structures in plain English
Sole proprietor. You and the business are the same legal person. All your trade profit lands on your personal T1 return and is taxed at your personal rate. There is almost no setup admin and the filing is simple, but there is no liability shield: every contract dispute, site injury and unpaid supply bill is yours personally.
Corporation. Specifically a Canadian-controlled private corporation (CCPC). It is a separate legal person that files its own T2 corporate return and pays corporate tax. You only pay personal tax when you take money out, as salary or dividends. It limits your liability as a shareholder to what you put in, and it can look more established to general contractors and commercial clients, some of whom require subcontractors to be incorporated or carry minimum insurance before awarding subcontracts.
Liability: the reason that matters on site
For a tradesperson working in people's homes and on busy sites, the liability point is not abstract. A sole proprietor is personally on the hook for every judgment against the business: a botched job, a flood, an injury, an unpaid materials bill. Your house and personal savings are exposed. Incorporation limits a shareholder's liability to the amount invested in the company.
Two honest caveats keep this real. First, the shield has exceptions: fraud, and any debt you personally guarantee (banks and some suppliers will ask a one-person corporation's owner to sign a personal guarantee, which pierces the shield for that debt). Second, the corporate veil can be lifted if you treat the company as your personal piggy bank, mixing corporate and personal money. To keep the protection, keep clean separate accounts and pay yourself a defined salary or dividend rather than dipping in at random.
The small business deduction: the real tax draw
The headline reason trades incorporate is the Small Business Deduction (SBD). A qualifying CCPC pays federal corporate tax at only 9 percent on its first $500,000 of active business income, instead of the general net federal rate of 15 percent. Each province adds its own small-business rate on top, so the combined federal-plus-provincial small-business rate typically lands somewhere around 9 to 12.2 percent depending on where you are: it is about 9 percent in Manitoba and Yukon (no provincial small-business tax), around 11 percent in Alberta and British Columbia, and about 12.2 percent in Ontario and Quebec.
To qualify for the SBD the CCPC must:
- Earn active business income. Trade work qualifies; passive investment income does not.
- Hold less than $10 million in taxable capital employed in Canada. The SBD phases out between $10 million and $50 million of taxable capital, which no one-person trade company comes near.
- Keep passive investment income under $50,000. Above that, the SBD business limit shrinks by $5 for every $1 of passive income, hitting zero at $150,000 of passive income.
Most one-person trade companies clear all three tests easily.
Tax deferral, not free money
The saving is mostly a deferral, and understanding that stops people incorporating for the wrong reasons. Profit left inside the company is taxed at the low corporate rate now; you pay personal tax later, when you draw it out. Take an Ontario example. A corporation earning $200,000 pays roughly 12.2 percent corporate tax, about $24,400. The same $200,000 earned by a sole proprietor at Ontario marginal rates could attract personal tax in the region of $86,000 to $94,000. The gap looks enormous, but you only keep it for as long as the money stays in the company. If you need every dollar to live on, you draw it all out and pay personal tax on it, and the deferral largely disappears. That is exactly why incorporation rarely pays below the break-even.
A worked comparison
Take a tradesperson clearing $120,000 net profit who needs $70,000 to live on:
- Sole proprietor: the full $120,000 is taxed personally this year, whether or not it is spent.
- Corporation: the company pays the low small-business rate on the $120,000. You draw $70,000 as salary or dividends and pay personal tax on that, and the remaining $50,000 stays in the company, taxed only at the low corporate rate, available to reinvest in tools, a vehicle, or to carry a slow winter.
That retained $50,000 is where incorporation earns its keep. For a tradesperson who clears $60,000 and spends all of it, none of this applies: stay a sole proprietor. The credibility a corporation lends with commercial clients can tip the decision, but it rarely justifies the cost on its own.
Credibility and commercial work
There is a non-tax reason trades incorporate that is easy to dismiss but real. An incorporated name (for example, "Smith Contracting Inc.") often reads as more established to general contractors, property managers and commercial clients. Some general contractors and commercial clients will not award a subcontract unless the supplier is incorporated, or unless it carries a minimum level of insurance that they expect from an incorporated firm. If your growth plan runs through commercial and institutional work rather than residential homeowners, that gate can matter more than the tax arithmetic, and it is worth weighing alongside the break-even. For a tradesperson whose work is almost entirely residential and word-of-mouth, the credibility argument carries far less weight, and the decision comes back to the tax deferral and the running cost.
Salary versus dividends: the choice you make every year
Incorporating is not the end of the decision; it opens a new one you revisit annually. Money you take out of the corporation comes out as salary, as dividends, or as a mix, and the right blend depends on your numbers. Salary is a deductible expense to the company, generates RRSP contribution room and counts as pensionable earnings for the Canada Pension Plan, but it attracts CPP and personal tax. Dividends are paid from after-tax corporate profit, carry no CPP, and are taxed in your hands at the dividend rates, but they build no RRSP room and no CPP entitlement. Neither is automatically better; the optimal mix turns on how much you need to draw, your RRSP and CPP goals, and your province. This is exactly the kind of decision a CPA earns their fee on, and it is one more reason not to incorporate purely on a rule of thumb.
What incorporation actually costs
Incorporation is not free, and the running cost is what most people underestimate.
- Setup: roughly $200 to $450 in government fees, plus around $500 to $2,000 if a lawyer drafts the share structure and any agreements. Fees vary by jurisdiction; confirm the current figure with the registry where you incorporate.
- Yearly: a T2 corporate return typically costs $1,500 to $3,000 from an accountant, against around $500 to $800 for a sole proprietor's T1 with a business schedule. All in, incorporation tends to add roughly $2,500 to $5,000 a year in accounting, legal and admin.
That extra annual cost has to be earned back in tax saving before incorporation makes sense, which is the arithmetic behind the $80,000-to-$100,000 break-even. There is one bonus down the line: the Lifetime Capital Gains Exemption. If you sell shares in a qualifying small business corporation, the first $1.25 million (2025 figure) of capital gain can be sheltered from personal tax, which is not available to a sole proprietor. That alone is a reason some trades incorporate well before a planned sale.
Federal versus provincial incorporation
You can incorporate federally through Corporations Canada, or provincially through your provincial corporate registry. The practical difference for a tradesperson:
- Federal incorporation costs about $200 online and gives you name protection across all of Canada. But you still have to register as an extra-provincial corporation in every province where you actually do business, which adds fees and filings.
- Provincial incorporation registers you in one province. For a tradesperson working in a single province, this is simpler and usually the better choice. Government fees vary widely by province (commonly a few hundred dollars plus a name search), so confirm the current fee with your registry. Named companies usually need a NUANS name-availability search first in most provinces.
If you work across a provincial border, or plan to expand nationally, federal incorporation can be worth the extra extra-provincial registrations. Otherwise, provincial is the default for one-province trades.
The administrative reality after you incorporate
A corporation is more than a tax wrapper; it is an ongoing obligation. You file a separate T2 each year, keep corporate records and minute books, file annual returns with the registry, and decide each year on the salary-versus-dividend mix that suits your situation. You also need a separate corporate bank account and must keep corporate and personal money strictly apart, both to preserve the liability shield and to satisfy the CRA. And one trap that catches people: if you start as a sole proprietor with a Business Number and then incorporate, the corporation gets a brand-new BN, and your old sole-proprietor GST/HST and payroll accounts do not transfer. You register them fresh on the corporate BN (see The CRA Business Number and Program Accounts).
Common mistakes
- Incorporating for status. A corporation that pays out every dollar of profit, keeping nothing inside, captures little of the tax benefit while paying all the extra cost.
- Ignoring the running cost. The extra $2,500 to $5,000 a year in compliance must be earned back in tax saving first.
- Assuming the liability shield is absolute. Personal guarantees and fraud pierce it, and commingling money can lift the corporate veil.
- Incorporating federally for a one-province business. It adds extra-provincial registrations you do not need; provincial is usually simpler.
- Forgetting the accounts do not transfer. A new corporate BN means new GST/HST and payroll registrations.
- Deciding alone. The optimal structure and the salary-versus-dividend mix change with your numbers. Talk to a CPA before you incorporate.
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Keep reading
Need help pricing your work? Read Section 14: Pricing Your Work - day rates, job prices and how to stop underselling yourself.
Finished your apprenticeship? Read our guide: After Your Apprenticeship - the stuff nobody teaches you in college.
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