Most tradespeople should start as a sole proprietor and only incorporate once they are consistently earning more than they need to live on. As a sole proprietor, your business profit is taxed on your personal T1 return at marginal rates that reach roughly 45 to 54 percent at higher incomes, and you carry unlimited personal liability. A corporation is a separate legal person that pays tax at far lower corporate rates, but it costs more to set up and run. The break-even point is commonly cited around $80,000 to $100,000 of net profit per year, and only if you can leave some of that profit inside the company.
The two structures in plain English
Sole proprietor. You and the business are one and the same. All the trade income lands on your personal tax return and is taxed at your personal rate. There is almost no setup admin, 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 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 (fraud and personal guarantees are exceptions), and it can look more established to general contractors and commercial clients, some of whom require subcontractors to be incorporated.
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 the province.
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), and 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). Most one-person trade companies clear all three tests easily.
Tax deferral, not magic
The saving is mostly a deferral. 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 about 12.2 percent corporate tax, roughly $24,400. The same income earned by a sole proprietor at Ontario marginal rates could attract personal tax in the region of $86,000 to $94,000. The gap is real, 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 the deferral largely disappears, which is why incorporation rarely pays below the break-even.
A worked comparison
Take a tradesperson clearing $120,000 net profit who only 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 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.
What incorporation actually costs
- Setup: roughly $200 to $450 in government fees, plus around $500 to $2,000 if a lawyer drafts share structure and 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, versus around $500 to $800 for a T1 with a business schedule. All in, incorporation tends to add roughly $2,500 to $5,000 a year in accounting, legal and admin.
There is one bonus for incorporators 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 exempt from personal tax, which is not available to sole proprietors.
Common mistakes
- Incorporating for status. A corporation that pays out every dollar of profit, keeping nothing inside, captures little of the benefit while paying all the extra cost.
- Ignoring the running cost. The extra $2,500 to $5,000 a year in compliance has to be earned back in tax saving before incorporation makes sense.
- Forgetting that accounts do not transfer. If you incorporate later, your sole-proprietor GST/HST and payroll accounts do not move to the new corporate Business Number. You register them fresh.
- Deciding alone. The optimal salary-versus-dividend mix, and quirks like cash damming, 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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