Introduction
The "should I incorporate?" question never goes away — but the answer changes as income grows, rates adjust, and personal circumstances evolve. This article models the comparison for Ontario contractors at 2026 rates, at three income levels: $120,000, $200,000, and $350,000.
What Changes With Incorporation
Unincorporated contractor: All net income is personal income in the year earned. The contractor pays CPP as a self-employed person (both employee and employer portions). The contractor deducts business expenses on T2125. Every dollar is taxed at personal marginal rates.
Incorporated contractor: The corporation earns the income. Corporate tax at the small business rate applies. The owner draws salary or dividends — paying personal tax only on what is distributed. Income retained in the corporation is not yet personally taxed. There is a deferral benefit equal to the difference between the corporate tax rate and the personal marginal rate.
The Comparison at $120,000 Net Income
At $120,000 of net income, the personal marginal rate in Ontario is approximately 43.41% on income above the federal second bracket. Self-employment CPP adds approximately $7,735.
Unincorporated: Tax + CPP ≈ $45,500. Net take-home ≈ $74,500.
Incorporated, salary of $60,000 + $60,000 retained: Personal tax on $60,000 salary ≈ $12,900. CPP on $60,000 salary ≈ $7,735. Corporate tax on $60,000 retained at small business rate ≈ $7,320. Total taxes ≈ $27,955. Net personal income ≈ $47,100 + $52,680 in the corporation after tax.
The incorporation advantage at $120,000 is real but modest — approximately $17,500 in deferred tax. Against the annual compliance cost of a corporation (approximately $3,000–$5,000), the net advantage in year one is modest. The advantage compounds over time as retained earnings grow.
Conclusion at $120,000: Incorporation makes sense if the contractor does not need all of the income personally — i.e., if $60,000 of personal income is sufficient for living expenses and the balance can remain in the corporation. If the contractor needs all of the income personally, the savings are minimal and the administrative cost may not be justified.
The Comparison at $200,000 Net Income
At $200,000, the marginal rate exceeds 46% in Ontario.
Unincorporated: Tax + CPP ≈ $78,500. Net ≈ $121,500.
Incorporated, salary of $100,000 + $100,000 retained: Personal tax on $100,000 ≈ $26,000. CPP ≈ $7,735. Corporate tax on $100,000 at SBD rate ≈ $12,200. Total ≈ $45,935. Personal income ≈ $74,000 + $87,800 in corporation.
Tax deferral ≈ $32,500 annually. Against compliance costs, the case for incorporation is clear if the contractor can live on $74,000 personally.
The Comparison at $350,000 Net Income
At $350,000, the marginal rate is approaching 53.53% at the top bracket.
Unincorporated: Tax + CPP (on first $73,200 of earnings only) ≈ $155,000. Net ≈ $195,000.
Incorporated, salary of $130,000 + $220,000 retained: Personal tax on $130,000 ≈ $38,000. CPP ≈ $7,735. Corporate tax on $220,000 at SBD rate ≈ $26,840. Total ≈ $72,575. Personal income ≈ $92,000 + $193,160 in corporation.
Tax deferral ≈ $82,000 annually. Incorporation is clearly the correct structure at this income level for a contractor who does not need all $350,000 personally.
The Caveat: The PSB Risk for Contractors
As discussed in Article 55, a contractor who works exclusively for one client and is functionally an employee is at risk of PSB classification — which eliminates most of the small business deduction. At any income level, PSB risk must be assessed before assuming the SBD rate applies.
When to Speak With a CPA
The decision to incorporate is worth modelling at your specific income level, personal living cost requirements, and CPP/RRSP strategy. The numbers above are illustrative — the actual analysis depends on your province, your personal income composition, and the amount you need to draw personally each year.