Introduction

One of the most common reasons business owners consider incorporation is the belief that corporations “pay less tax.” While this can be true in certain situations, corporate taxation in Ontario is more nuanced than a single low rate.

The amount of tax a corporation pays depends on the type of income it earns, whether it qualifies for the small business deduction, and how profits are eventually paid out to the owner. Understanding how corporate tax actually works helps set realistic expectations and avoid planning mistakes.

Key Takeaways

Corporations pay tax separately from individuals
Ontario has different tax rates for different types of corporate income
Lower corporate tax rates create tax deferral, not automatic tax savings
Personal tax is still payable when profits are withdrawn

Who This Applies To

This applies to incorporated businesses in Ontario, owner-managed corporations, professionals operating through corporations, and business owners considering incorporation.

How Corporate Tax Works in Ontario

A corporation is a separate legal taxpayer. It files its own corporate tax return and pays tax on its taxable income. For Canadian-controlled private corporations, certain active business income may qualify for the small business deduction, which applies a lower corporate tax rate up to an annual limit.

According to the CRA and the Department of Finance Canada, corporate income is taxed first at the corporate level and again at the personal level when profits are paid out as salary or dividends.

Corporate Tax Rates in Ontario

Corporations that qualify for the small business deduction pay a lower combined federal and Ontario tax rate on active business income up to the annual limit. Income above that limit, or income that does not qualify, is taxed at a higher general corporate rate.

These rates change periodically, and businesses should always confirm current rates for the relevant tax year.

What This Means in Practice

The lower corporate tax rate does not eliminate tax. It allows profits to be retained in the corporation at a lower upfront tax cost. When funds are later withdrawn personally, additional personal tax applies.

If all profits are withdrawn each year, total tax paid is often similar to personal taxation due to Canada’s integration system. The real benefit of incorporation appears when profits can remain in the corporation for reinvestment or future use.

Common Misunderstandings

Many business owners assume incorporation automatically reduces their total tax bill. Others believe corporate tax rates apply to all income regardless of activity. In reality, eligibility for lower rates depends on how the business operates and how income is classified.

Frequently Asked Questions

Do corporations always pay less tax than individuals?
No. The benefit depends on how much income is retained versus withdrawn.

Are corporate tax rates the same across Canada?
No. Provincial rates vary.

Do I still pay personal tax if I have a corporation?
Yes. Personal tax applies when income is paid out to you.

Closing

Understanding corporate tax rates is an important first step, but effective planning requires looking at how corporate and personal tax work together over time. For many business owners, the value of incorporation lies in long-term flexibility rather than immediate tax savings.