One of the most common decisions a growing service professional in Ontario faces is whether to incorporate. The short answer is that once you are earning over $80,000 to $100,000 in net profit, the tax math almost always favours a corporation. But the decision involves more than just tax rates.
How Sole Proprietorship Works
As a sole proprietor, your business income flows directly to your personal tax return. You pay tax at personal marginal rates on every dollar you earn. Ontario’s top marginal rate in 2026 is over 53% for income above $246,752. For income between $100,392 and $150,000, you are paying around 43%. There is no deferral, no retention inside a business entity, and no splitting of income with family members.
The upside: it is simple. No corporate filing, no separate bank account requirements, no annual corporate maintenance. You file a T1 with a T2125 business income statement and you are done.
How a Professional Corporation Works
When you incorporate, your business becomes a separate legal entity. That entity pays corporate income tax at a much lower rate (approximately 12.2% in Ontario on the first $500,000 of active business income). You then choose how much to pay yourself — as salary, dividends, or a combination — and pay personal tax only on what you extract.
The money you leave inside the corporation is taxed at 12.2% and can be invested and compounded before you eventually draw it down in retirement, potentially at much lower rates.
The Tax Deferral Advantage
If you earn $200,000 in net profit as a sole proprietor, you pay personal tax on the full $200,000 this year. If you earn $200,000 through a corporation and only need $100,000 to live on, you pay corporate tax on $200,000 at 12.2% and personal tax on the $100,000 you draw out. The remaining $100,000 (less the corporate tax) stays in the corporation and compounds over time.
Over 10 to 20 years, this deferral advantage is worth hundreds of thousands of dollars for most incorporated professionals.
Costs and Obligations of Incorporation
Incorporating is not free. You should expect:
- Incorporation costs: $500 to $1,500 depending on the lawyer or service you use
- Annual corporate maintenance: minute book updates, annual returns
- Higher accounting fees: a T2 corporate return costs more than a sole proprietor T1
- Separate business bank account and bookkeeping
For most professionals earning over $100,000 in net profit, the tax savings far outweigh these costs. For someone earning $60,000, the math is closer and depends on individual circumstances.
Liability Protection
Incorporation provides personal liability protection. If your business faces a lawsuit, your personal assets are generally shielded from business creditors. For professionals in regulated industries (law, medicine, dentistry), a Professional Corporation provides this protection while complying with the requirements of your regulatory college.
Note: professional liability for your own negligence is typically not shielded by incorporation. Your professional liability insurance is still essential.
When Should You Incorporate?
A reasonable rule of thumb: when your net business income consistently exceeds $80,000 to $100,000 per year, it is time to have a serious conversation about incorporating. Below that level, the accounting costs and complexity may not justify the savings. Above that level, the math almost always points to incorporation.
Not sure whether incorporation makes sense for your situation? Book a free 20-minute intro call with Featherly. We work with both sole proprietors and incorporated professionals across Ontario.