One of the most common questions Ontario business owners ask is:

Should I operate as a sole proprietor or incorporate my business?

The answer depends on taxes, income level, liability, and long-term goals. Choosing the wrong structure can result in higher taxes, personal risk, and CRA issues.

This guide explains the tax differences between a sole proprietorship and a corporation in Ontario, helping you decide which structure is better for taxes in 2025.

What Is a Sole Proprietorship in Ontario?

A sole proprietorship is the simplest business structure in Ontario. The business and the owner are legally the same.

Key Features:

• Business income reported on T1 personal tax return
• No legal separation between owner and business
• Simple setup and low cost
• Owner taxed at personal tax rates

What Is a Corporation in Ontario?

A corporation is a separate legal entity from its owner.

Key Features:

• Files a T2 corporate tax return
• Eligible for lower corporate tax rates
• Limited liability protection
• More compliance and administrative work
• Greater tax planning flexibility

Tax Comparison: Sole Proprietor vs Corporation (Ontario)

Sole Proprietor – Tax Treatment

• All business income taxed at personal marginal tax rates
• Higher tax rates as income increases
• CPP paid on net business income
• No ability to defer tax inside the business

📌 Best suited for:

Small businesses with lower income and minimal liability risk.

Corporation – Tax Treatment

• Active business income eligible for Small Business Deduction
• Ontario small business corporate tax rate is significantly lower than personal rates
• Ability to defer personal tax by leaving profits in the corporation
• Flexibility to pay salary, dividends, or a mix

📌 Best suited for:

Businesses with growing or higher income, liability exposure, and long-term plans.

Ontario Small Business Tax Advantage (Key Factor)

Corporations in Ontario benefit from:

• Federal + Ontario Small Business Deduction
• Lower tax on first $500,000 of active business income
• Significant tax deferral opportunities

This is often the biggest reason businesses incorporate.

CPP Considerations

Sole Proprietor

• Pays both employee and employer portions of CPP
• CPP based on net income

Corporation

• CPP only applies if salary is paid
• Dividends do not attract CPP
• Allows strategic CPP planning

Liability & Legal Protection

Sole Proprietor

• Personal assets at risk
• Owner personally liable for business debts and lawsuits

Corporation

• Limited liability protection
• Personal assets generally protected (with exceptions)

This is a critical non-tax factor many Ontario business owners overlook.

HST Considerations (Ontario – 13%)

• Both structures must register for HST if revenue exceeds $30,000
• Corporation and sole proprietor have similar HST obligations
• Bookkeeping accuracy is essential to avoid CRA issues

When Incorporation Usually Makes Sense in Ontario

Incorporation is often beneficial when:

• Net income exceeds $80,000–$100,000
• You don’t need all profits personally
• You want tax deferral
• You face liability risk
• You want long-term growth flexibility

There is no one-size-fits-all answer—professional advice matters.

Common Mistakes Ontario Business Owners Make

• Incorporating too early (unnecessary cost)
• Incorporating too late (overpaying tax)
• Poor salary vs dividend planning
• Ignoring CPP and cash-flow impact
• Not maintaining corporate records

How a CPA Helps Decide the Right Structure

A CPA can:

• Compare tax outcomes under both structures
• Model salary vs dividend strategies
• Assess CRA audit risk
• Plan incorporation timing
• Ensure compliance with Ontario and CRA rules

Frequently Asked Questions (FAQs)

Is a corporation always better for taxes in Ontario?

No. A corporation is usually better at higher income levels, but not always for small or early-stage businesses.

At what income should I incorporate in Ontario?

Many businesses benefit from incorporation once net income exceeds $80,000–$100,000, but it depends on personal circumstances.

Do corporations pay less tax than sole proprietors?

Yes, on business income retained in the corporation. Personal tax applies when funds are withdrawn.

Can I change from sole proprietor to corporation later?

Yes. Many Ontario businesses start as sole proprietors and incorporate later with proper planning.

Does incorporation reduce CRA audit risk?

Not automatically. Clean bookkeeping and compliance matter more than structure.