Introduction
Every Canadian business owner faces one crucial question: Should I earn my income personally or through a corporation? The choice between Personal Tax and Corporate Tax can have a huge impact on how much you pay to the Canada Revenue Agency (CRA), how you grow your wealth, and how you manage cash flow.
Understanding these two tax structures isn’t just about compliance, it’s about optimizing your income structure to keep more of what you earn. Let’s explore the key differences, advantages, and practical ways to structure your income smarter.
Understanding the Basics Personal Tax vs Corporate Tax
What Is Personal Tax?
Personal Tax is what individuals pay on their total income, whether from a salary, business, or investments. Canada uses a progressive tax system, meaning higher earners pay higher rates. As a sole proprietor or freelancer, all your business income is taxed personally, even if you reinvest it.
Common personal tax deductions include:
- RRSP contributions
- Charitable donations
- Childcare expenses
- Employment-related costs
While personal tax filing is simpler, it offers limited tax planning flexibility.
What Is Corporate Tax?
Corporate Tax applies when your business is incorporated, meaning it’s a separate legal entity. The corporation pays tax on its profits, and you (as the owner) only pay personal tax when you withdraw money through salary or dividends.
Canada’s federal and provincial corporate tax rates are generally lower than personal rates, especially on the first $500,000 of active business income, thanks to the Small Business Deduction (SBD).
This setup allows owners to defer personal tax by keeping profits in the company.
Key Differences Between Personal and Corporate Tax
1. Tax Rates and Income Levels
- Personal income tax can climb up to 50%+ in some provinces.
- Corporate tax rates for small businesses hover around 12–15%, depending on the province. This makes incorporation attractive for businesses earning beyond what the owner personally needs to live.
2. Timing of Tax Payments
- Personal Tax: Paid annually on your total income.
- Corporate Tax: Paid by the business, allowing deferral of personal taxes until money is withdrawn.
Tax deferral is a powerful advantagez, it allows more funds to stay within the business for growth or investment.
3. Deductions and Write-Offs
- Personal deductions are limited.
- Corporations can deduct a wider range of business-related expenses, such as:
- Salaries
- Office rent
- Vehicles
- Marketing and accounting fees
This flexibility often leads to lower overall taxable income.
4. Flexibility and Control
Corporate structures give owners far more control over how and when income is taken. For example, you can:
- Split income with a spouse (where eligible)
- Pay yourself dividends or salary strategically
- Retain profits in the corporation for future use
How to Optimize Your Income Structure
When to Operate as an Individual (Personal Tax Structure)
If your business is small, part-time, or in its early stages, staying unincorporated can be simpler. Advantages include:
- Lower administrative costs
- Easier tax filing
- No need to maintain corporate books or pay annual incorporation fees
This structure suits freelancers, independent contractors, and startups still building revenue.
When to Incorporate for Tax Efficiency
Incorporating makes sense when your business earns more than your personal spending needs. Key benefits include:
- Tax deferral: Pay corporate tax now and personal tax later.
- Small Business Deduction (SBD): Lower tax rate on the first $500,000 of income.
- Professional image: Attracts clients and potential investors.
Incorporation allows long-term tax planning and growth potential.
Using a Combination Strategy
The best approach often lies between the two, combining salary and dividends for optimal results.
A balanced plan might include:
- Paying a small salary to generate RRSP room.
- Taking dividends to minimize payroll taxes.
- Leaving profits in the business to defer personal tax.
This hybrid strategy ensures tax efficiency while maintaining cash flow flexibility.
Practical Example: Comparing Two Scenarios
Case Study 1: Sole Proprietor Earning $100,000
All income is taxed personally. After federal and provincial taxes, the individual might keep around $65,000 (depending on province).
Case Study 2: Incorporated Business Earning $100,000
- Corporation pays ~12% corporate tax ($12,000).
- Owner withdraws part as dividends or salary.
- Remaining profit stays in the business, deferring personal tax.
This can result in $5,000–$10,000 in annual savings and better long-term financial control.
Common Mistakes in Tax Structure Optimization
- Not Planning Withdrawals Properly: Taking too much salary or dividends at once can push you into higher tax brackets.
- Ignoring Tax Deferral Opportunities: Withdrawing all profits each year negates the corporate advantage.
- Failing to Reassess Annually: Income levels and tax laws change, review your structure yearly with a professional.
Why Professional Tax Planning Matters
Expertise in Balancing Personal and Corporate Tax
A professional accountant can determine the best income split between salary and dividends to minimize total taxes.
Long-Term Financial Strategy
Proper tax planning integrates with your business goals, retirement strategy, and investment plans.
How Firms Like Skans Accountants Help
At Skans Accountants, our team specializes in:
- Corporate and personal tax filing
- Business incorporation and restructuring
- Income optimization and CRA compliance
We ensure your tax structure is legally efficient and financially smart.
Conclusion
Choosing between Personal Tax and Corporate Tax isn’t a one-time decision, it’s a strategy. The right structure can mean thousands in savings, better cash flow, and long-term wealth growth.
Ready to optimize your income structure? Talk to the experts at Skans Accountants today and discover the most tax-efficient way to grow your business.
