Incorporate · By Industry
Often yes. A corporation lets you keep profit at Ontario's ~12.2% small-business rate and defer personal tax on income you don't draw. But if you bill one agency or one client who directs your work like an employer, the CRA can label you a personal services business and strip that benefit. The distinction is everything for contractors.
Often yes. A corporation lets you keep profit at Ontario's ~12.2% small-business rate and defer personal tax on income you don't draw. But if you bill one agency or one client who directs your work like an employer, the CRA can label you a personal services business and strip that benefit. The distinction is everything for contractors.
If you take only one thing from this page, take this: IT and software contractors are the single most common target of the CRA's personal-services-business (PSB) rules. The classic pattern, leaving a dev job, incorporating, and going back to bill the same shop (or a single agency placing you at one client) through your corporation while doing effectively the same work under their direction, is exactly what those rules were written to catch.
A PSB doesn't get the small-business deduction. Instead of ~12.2%, its active income is taxed around 44.5% combined, and it can't deduct most ordinary expenses (only limited things like salary paid to the incorporated employee). That obliterates the reason most contractors incorporate in the first place. The CRA has run audit projects specifically on incorporated IT contractors, so this is not a theoretical risk.
The test is about control and independence, not job title. Who decides when, where and how you work? Do you use your own equipment? Can you take on other clients, subcontract the work, or be let go like a supplier rather than fired like staff? The more you look like a genuine independent business serving multiple clients, the safer you are.
Many contractors start out as a sole proprietor, invoicing the agency and receiving a T4A at year-end. That's simple: your business income flows onto your personal return, you pay tax at your personal rate, and there's no corporation to maintain. It's a perfectly reasonable way to begin, especially in your first year while you find out whether contracting sticks.
Incorporating adds a separate legal person (your corporation) between you and the client. The corporation earns the income, pays corporate tax at the small-business rate, and pays you a salary or dividends. The upside is deferral and limited liability; the cost is roughly $579 to set up plus a few hundred a year in accounting and a corporate tax return. The math tips toward incorporating once you're earning well above what you need to live on and the PSB risk is clearly manageable.
One nuance contractors miss: incorporating doesn't fix a PSB problem. If your working relationship looks like employment, wrapping a corporation around it can actually make things worse, not better. Fix the relationship (or diversify your clients) first.
The small-business deduction is why incorporation works. It taxes the first $500,000 of active business income at roughly 12.2% in Ontario, versus a personal rate that tops out near 53.5%. On $150,000 of retained profit, that difference can be tens of thousands of dollars staying inside your company to invest or smooth out lean months.
But the deduction only applies to active business income from a genuine business, not to a PSB, and not to purely passive investment income. So protecting it means running a real contracting business: several clients over time, your own tools, contracts for deliverables, and enough independence that no single client controls your day. Keep clean records that show this, because if you're ever questioned, the paper trail is what saves the deduction.
Most Ontario-based IT contractors incorporate provincially under the OBCA. The government fee is $300, there's no director-residency requirement (Ontario repealed it in 2021), and it's the simplest fit if your clients and registered office are in Ontario. Federal incorporation ($200 CBCA fee) suits contractors who want a nationally-protected name or expect to operate across provinces, but note that federal corporations need at least 25% resident-Canadian directors (at least one if your board has fewer than four), and you still register extra-provincially where you actually carry on business.
Numbered (e.g. 1234567 Ontario Inc.) is fastest and cheapest and reads fine on an invoice. A named corporation adds a NUANS search and a bit of cost, and makes sense if you're building a brand or a consulting shop you may grow. Either way you can add or change a name later through an amendment.
You fill out a short questionnaire: numbered or named, your director and shareholder, an Ontario registered office, and a simple share structure. It takes about fifteen minutes, and we sanity-check it before you pay.
We prepare your Articles of Incorporation, By-law No. 1, organizational resolutions and share registers, and file with the Ontario Business Registry, usually within one to two business hours. Your complete digital minute book arrives the same day, ready for the business bank account your agency or client will want you to invoice from.
Three steps, no lawyer, no registry queue.
Tell us about your contract work
Choose numbered or named, name your director and shareholder, and give an Ontario registered office. About fifteen minutes.
We prepare and file
CorpStart drafts your Articles, By-law No. 1 and resolutions, then files with the Ontario Business Registry, usually within 1 to 2 business hours.
Invoice through your corporation
Your Certificate of Incorporation and digital minute book arrive by email the same day, ready for a business bank account and your first corporate invoice.
Sole prop (T4A) vs. incorporating as an IT contractor
| Factor | Sole prop / T4A | Corporation |
|---|---|---|
| Tax on retained profit | Personal rate (up to ~53.5%) | ~12.2% (if it's not a PSB) |
| Tax deferral possible? | No | Yes, on income you don't draw |
| PSB risk if one client controls you | Not applicable | High: deduction can be lost |
| Liability protection | None | Limited to the corporation |
| Setup + ongoing cost | Low | ~$579 setup + annual accounting |
| Best when… | First year, or one directing client | Multiple clients, profit above your needs |
I contract through one agency at a single client. Is incorporating a good idea?
Proceed carefully. That's the textbook personal-services-business setup. If the client directs when, where and how you work and you use their equipment, the CRA may treat your corporation as a PSB, taxed around 44.5% with almost no deductions. Incorporating won't fix that; if anything it formalizes the problem. Diversify clients or genuinely control your work first, and talk to an accountant about your specific arrangement.
What actually makes me a PSB versus a real business?
It's about control and independence, not your title. Multiple clients over time, your own equipment, the right to subcontract or send someone else, contracts for deliverables rather than hours, and a client who can terminate you like a supplier: those point to a genuine business. A single client who controls your schedule and tools points to a PSB.
Should I incorporate federally or in Ontario?
If your clients and office are in Ontario, provincial OBCA incorporation ($300 fee, no residency requirement) is usually simplest. Federal ($200) gives a nationally-protected name and suits multi-province work, but it needs at least 25% resident-Canadian directors and still requires extra-provincial registration where you operate. CorpStart files both.
Can I keep contracting as a sole proprietor instead?
Absolutely, and many contractors do for their first year. You invoice, receive a T4A, and report the income personally, no corporation to maintain. Incorporating makes sense once your profit comfortably exceeds your living costs and your PSB risk is low. There's no rush to incorporate on day one.
How fast can CorpStart incorporate me?
Ontario online incorporations are accepted immediately by the registry. CorpStart typically submits your filing within 1 to 2 business hours and delivers your digital minute book the same day, so you can open a business account and start invoicing right away.
Ready to contract through a corporation?
$279 service fee + $300 Ontario government fee. Submitted to the Ontario Business Registry within 1 to 2 business hours, digital minute book the same day.
Start my corporationCorpStart is a document preparation service, not a law firm. The information on this page is general in nature and does not constitute legal or tax advice. For advice specific to your situation, consult a licensed lawyer or accountant.