If you are an incorporated consultant in Ontario, you are in one of the best positions available when it comes to tax planning. A corporation gives you tools that employees and unincorporated freelancers simply do not have. But those tools only work if you use them, and most incorporated consultants are leaving significant money on the table because nobody has walked them through the options.
Use the Small Business Deduction
The first $500,000 of active business income earned by a Canadian Controlled Private Corporation (CCPC) is taxed at a significantly lower rate than personal income. In Ontario, the combined federal and provincial corporate tax rate on that first $500,000 is approximately 12.2%, compared to a top personal marginal rate over 53%.
This is the core reason incorporating makes sense for consultants earning over $100,000 in net profit. You can retain money inside the corporation at 12.2% and invest it, rather than drawing it all out and paying personal tax immediately.
Deductible Expenses Most Consultants Miss
Beyond the obvious business expenses, incorporated consultants often overlook:
- Home office expenses (proportional square footage of your dedicated workspace)
- Internet and phone (business portion)
- Professional development courses, certifications, and conferences
- Software subscriptions used for client work
- Vehicle expenses with a mileage log (client meetings, site visits)
- Professional liability insurance
- Health spending account contributions inside the corporation
- Life insurance in certain structures
Optimize Your Salary and Dividend Mix
The split between salary and dividends is one of the highest-value decisions an incorporated consultant makes each year. The right answer depends on your personal income, RRSP goals, CPP position, and how much money you want to retain in the corporation.
A simple rule of thumb: pay yourself enough salary to generate the RRSP contribution room you want, then top up with dividends. But run the numbers specifically for your situation before deciding.
Income Splitting Through a Spousal Shareholder
If your spouse or adult family members are shareholders of your corporation, dividends can be paid to them, potentially at lower tax rates depending on their income. The Tax on Split Income (TOSI) rules that came into effect in 2018 limit this strategy in some cases, so it needs to be structured properly. But when done correctly, it remains a legitimate and effective way to reduce the family’s overall tax burden.
Retain Earnings and Invest Inside the Corporation
One of the most powerful tools available to incorporated consultants is the ability to leave money inside the corporation and invest it. You pay 12.2% corporate tax on that income instead of 53% personal tax. The after-tax dollars compound inside the corporation over time, and you draw them out in retirement at potentially lower tax rates.
The tradeoff: once passive investment income inside the corporation exceeds $50,000 per year, the small business deduction starts to phase out. This is worth monitoring as your retained earnings grow.
The PSB Risk: Make Sure You Are Actually a Business
CRA has a concept called a Personal Services Business (PSB). If your consulting corporation looks too much like an employer-employee relationship with a single client, CRA may reclassify your income and deny most of your deductions while applying a higher tax rate. If the majority of your revenue comes from one client and you work exclusively for them, talk to your accountant about PSB risk.
Questions about your consulting corporation? Book a free 20-minute intro call with Featherly. We work exclusively with incorporated service professionals in Ontario.