Contractor or incorporation: which is better for a remote Canadian?

The core question

You're a Canadian doing remote contract work — for US clients, Canadian clients, or a mix. Two options for how to structure yourself:

1. Sole proprietor — you invoice personally. Net income goes on your personal tax return as self-employment income. Simple, cheap, less tax-efficient at high income.
2. Canadian corporation — you incorporate, the corporation invoices, and you pay yourself via salary and/or dividends. More complex, more expensive, more tax-efficient at certain income levels.

The right answer depends heavily on your situation. This page walks through the tradeoffs.

This is general information, not tax advice. Talk to a Canadian accountant before deciding.

Sole proprietorship: how it works

No legal separation between you and the business. You register a business name (optional), get a CRA business number if needed for GST/HST, and start invoicing.

How you're taxed:

• All net business income flows to your personal tax return.
• Taxed at your marginal personal rate (federal + provincial).
• You pay both halves of CPP on self-employment income.
• Business losses can offset other personal income.

Costs to set up and run:

• Setup: $0 to $100 for optional business registration.
• Annual accounting: simple, $300 to $800 if you use an accountant.
• No separate corporate tax filing.

Corporation: how it works

A separate legal entity that you own (as a shareholder) and typically work for (as an employee and/or director). The corporation earns the income, pays corporate tax, and then passes money to you as salary, dividends, or both.

How it's taxed:

• Corporation pays corporate tax on its profit (approximately 12.2% in most provinces for active business income under $500K, much lower than personal marginal rates at high income).
• You pay personal tax on salary or dividends you receive from the corporation.
• Income retained inside the corporation is taxed only at the corporate rate until you eventually draw it out.

Costs to set up and run:

• Setup: $1,000 to $2,000 (legal fees, incorporation fees).
• Annual accounting: $1,500 to $3,500 (corporate tax return is more complex).
• Annual corporate filings.
• Separate bookkeeping.
• Potentially additional professional fees (legal, payroll if you run salary).

The tax-deferral benefit

The main reason to incorporate: tax deferral.

If you earn $200K in net business income and only need $100K personally, incorporating lets you pay yourself $100K (taxed at your personal rate) and leave $100K inside the corporation (taxed at ~12%). That leftover $100K stays in the corporation earning investments, paying you later when your marginal rate is lower (retirement), or funding the business.

In a sole proprietorship, the full $200K is taxed at personal rates right now, even if you only need $100K to live on.

The bigger the gap between what you earn and what you need, the bigger the deferral benefit.

When sole proprietorship wins

• Your net income is under $100K to $120K. At these levels, the deferral benefit is small and the accounting cost of a corporation eats most of it.
• You spend everything you earn. No deferral benefit if you're withdrawing it all anyway.
• Your business is uncertain or short-term. If you might go back to employment in a year, the corp overhead isn't worth it.
• You have a lot of business expenses that offset revenue. Net income is what matters for tax planning.

When incorporation wins

• Your net income is consistently above $150K to $200K. The deferral benefit starts covering the accounting overhead.
• You need less than you earn and can leave money in the corp.
• You have multiple clients or are building a scalable business. Corporation provides asset protection.
• You have business partners. Corp structure handles ownership and equity cleanly.
• You plan to sell the business eventually. Share sales have major tax advantages (Lifetime Capital Gains Exemption on qualifying small business shares).

The "pay yourself salary vs. dividends" question

Once incorporated, you choose how to extract money.

Salary:

• Treated as employment income.
• Generates CPP and RRSP room.
• Deductible for the corporation, reducing corporate tax.
• Requires payroll setup, T4 filings, source deductions.

Dividends:

• Treated as dividend income on your personal return.
• Does NOT generate CPP or RRSP room.
• Not deductible for the corporation.
• Simpler — just pay out of retained earnings.

Most incorporated Canadians use a mix — some salary (to create RRSP room and keep CPP contributions flowing) and some dividends (simpler, sometimes slightly tax-advantaged).

This is the exact kind of optimization an accountant earns their fee for. The right split depends on income level, province, and personal circumstances.

Contractor vs. employee (CRA's Personal Services Business risk)

Here's a trap many new incorporated contractors miss.

If you incorporate and have only one client that controls your work like an employer (sets hours, provides equipment, treats you as part of their team), CRA can classify your corporation as a Personal Services Business (PSB) under the Income Tax Act.

A PSB is taxed at very high rates (roughly 33% federal + provincial), loses most business expense deductions, and loses the small business deduction. It effectively eliminates every tax benefit of being incorporated.

Ways to reduce PSB risk:

• Have more than one client (or actively pursue multiple).
• Set your own hours and use your own equipment.
• Have a clear written contract that reflects a contractor relationship.
• Invoice on deliverables or milestones, not timesheets that mirror employment.
• Don't hold yourself out as an employee of the client (no corporate email, no business cards).

If you have a single client you work full-time for and the relationship looks indistinguishable from employment, incorporation may cost you money, not save it.

What to decide first: sole prop or corp

A quick rubric.

Stay sole prop if:

• Net income under ~$120K.
• Only one client and relationship looks employee-ish.
• Uncertain about whether contracting is long-term.
• Spend most of what you earn.
• Want minimum complexity.

Consider incorporating if:

• Net income consistently above $150K.
• Multiple clients (or actively pursuing).
• Need less than you earn.
• Longer-term view (2+ years).
• Worth $2,000+/year in accounting overhead.

Definitely incorporate if:

• Net income above $300K.
• Building a team or hiring subcontractors.
• Looking to sell the business eventually.
• Need asset protection (e.g., industries with liability risk).

The US client piece

For Canadians billing US clients, both structures work.

• Sole prop → file W-8BEN as an individual. Straightforward.
• Corporation → file W-8BEN-E as the corporation. Slightly more paperwork but the same treaty protection.

See how to set up as a Canadian contractor for a US company for the full setup.

The switch

You can start as sole prop and incorporate later — common. The reverse (incorporated → sole prop) is also possible but messier.

Many Canadians start as sole prop, hit the income threshold where incorporation makes sense, and transition around the $150K to $200K mark.

The bottom line

Sole proprietorship is simpler and cheaper; it's the right answer for most Canadians under $120K in net self-employment income. Incorporation is more complex and expensive but offers tax deferral and other benefits at higher income, especially when you need less than you earn. Watch the PSB trap if you have only one client. An accountant with contractor experience is worth the fee for this decision — the right choice can save or cost you tens of thousands over a decade.