Incorporation: A Path To Investment Growth And Tax Efficiency
An increasing number of professionals, consultants, investors, and entrepreneurs are choosing to incorporate. Approximately 89% of Small and Medium Enterprises (SMEs) are incorporated1. It’s not just for the huge companies with over 500 workers. Many small businesses with 1-9 employees can successfully incorporate. Not only does it provide legal protection, but it's also a powerful tool to build wealth, protect your brand, build your business’s reputation, optimize taxes, and gain strategic control over your financial future.
If you're earning income outside of traditional employment or building assets like real estate, understanding the benefits of incorporation could be your next strategic move.
Credibility and Capital Access Through Incorporation
While the tax and investment benefits are key, there's another reason Canadians choose to incorporate—credibility and access to capital. Having "Inc." or "Ltd." after your business name signals legitimacy to clients, lenders, and investors. It often makes it easier to open business accounts, secure lines of credit, or qualify for commercial financing.
Even for side hustlers or professionals working independently, incorporation can be the ticket to scaling up. Want to bring on a partner? Issue shares to an investor? Eventually, sell the business or pass it to your kids? A corporation gives you the legal and structural flexibility to do that.
Most compelling for long-term planners is access to the Lifetime Capital Gains Exemption (LCGE). If you eventually sell shares of your Canadian-controlled private corporation (CCPC), you may be eligible to shelter over $1 million in capital gains from tax (if you've met the holding and use requirements).
From Paycheque to Portfolio: Leveraging Corporate Tax Rates
One of the primary reasons Canadians consider incorporating is tax efficiency. At a basic level, corporations in Canada pay a significantly lower tax rate on active business income compared to high personal tax rates.
If your business qualifies for the Small Business Deduction (SBD), which applies to the first $500,000 of active income in most provinces, you could pay a corporate tax rate as low as 12.2% in Ontario or around 11% federally, compared to personal income tax rates that can exceed 50% in top brackets.
What does this mean in practice? Let's say your incorporated consulting business earns $150,000. If you don't need the full amount for personal use, you can retain earnings within the corporation, paying only the lower corporate rate. You then control when (and how much) you withdraw personally, potentially timing dividends in a more tax-efficient way.
While income splitting rules (particularly Tax on Split Income, or TOSI) have tightened, there are still legitimate ways to share income with adult family members who contribute to the business. This makes incorporation a tool not only for tax deferral but also for family wealth-planning.
Building Wealth Inside a Corporation
Beyond tax savings, incorporation can unlock a different approach to investing. Many incorporated Canadians are taking advantage of the ability to build investment portfolios inside their corporate structure using retained earnings.
Through a corporate investment account, your company can hold stocks, bonds, Exchange-Traded Funds (ETFs), real estate, and private equity. This can accelerate your ability to grow assets, especially if you're a high-income individual who has already maxed out your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA).
However, this approach comes with nuance. The Canada Revenue Agency (CRA) applies different tax treatments to passive investment income within a corporation. For example, if your passive income exceeds $50,000 annually, your corporation could see a reduction in the Small Business Deduction (SBD), meaning you'll lose access to those lower tax rates on your active income.
There are strategies to navigate this. Some professionals use holding companies to separate business income from investment income, thereby keeping the operating business eligible for the SBD. Others structure their investments to favour capital gains (which are more tax-friendly than interest income).
For real estate investors, incorporation provides additional benefits. You can isolate liability for each property, access more diverse mortgage options, and plan more effectively for succession or sale.
Is Incorporation Your Next Strategic Move?
Incorporation isn't for everyone. If you're just starting or if your income is inconsistent, the added costs of maintaining a corporation (such as bookkeeping, legal compliance, and tax filings) may outweigh the benefits. Incorporation doesn't eliminate taxes; it gives you more control over when and how you pay them.
But for many Canadians, especially those earning over $100,000 in self-employed income, investing heavily, or looking to scale, incorporation is a logical and powerful next step. It can help build a foundation for wealth, investment growth, and long-term financial control.
So, if you're ready to think bigger about your business and your financial future, it might be time to stop asking why. Seek out professional services of incorporation business2 leaders who can help you scale effectively and sustainably.
Laura Harvey, Owner and Founder of Ontario Business Central. As the owner of Ontario Business Central Inc., Laura has an unwavering commitment to nurturing the entrepreneurial landscape in Canada.
https://www.ontariobusinesscentral.ca/
1 https://ised-isde.canada.ca/site/sme-research-statistics/en/research-reports/sme-profile-ownership-demographics-statistics-2022#s4.2
2 https://www.ontariobusinesscentral.ca/incorporation.php