Updated Checked by the Tax-Services.ca editorial team How we check
Your business structure changes who pays the tax and when. A sole proprietor pays personal income tax on the net income of the business. A corporation pays its own tax on profit, and the owner pays again only on what comes out. On $200,000 of profit in Ontario, that gap looked like $61,165 against about $23,392 in our calculators, before any money moves to the owner.
How does each structure pay tax?
A sole proprietorship is the simplest. One person owns it, has no separate legal status from the business, and reports the net income on a personal return. A partnership has two or more partners who share profits and losses, and a simple verbal agreement is enough to form one. A corporation is set up by articles of incorporation filed with the federal or a provincial government.
The liability side differs too. Shareholders of a corporation have limited liability, so they aren’t responsible for the company’s debts. A sole proprietor and a partner don’t have that shield. That protection is often a bigger reason to incorporate than tax.
A corporation also has more paperwork. It files a T2 return within six months of its year end, even when it owes nothing.
What do the numbers look like at different profits?
Here is what the engine gives for an Ontario owner with no other income, using 2026 data. The corporate column is the tax the company pays, and it leaves out everything that happens when the owner takes the money.
| Business profit | Sole proprietor: income tax | Sole proprietor: CPP | Corporation: tax |
|---|---|---|---|
| $100,000 | $19,045 | $9,293 | $11,696 |
| $200,000 | $61,165 | $9,293 | $23,392 |
| $500,000 | $219,121 | $9,293 | $58,480 |
| $800,000 | $379,710 | $9,293 | $137,980 |
The self-employed tax calculator and the corporate tax calculator produced those figures. The corporate rate of 11.696% comes from a federal 9% small business rate plus an Ontario rate that we prorated across the July 2026 cut, so it’s a derived blend, not a published number. From 2027 the Ontario piece is 2.2%.
Read the first row slowly. On $100,000 the sole proprietor’s income tax and CPP add up to $28,338, while the company pays $11,696. That’s a $16,642 difference on paper. It only becomes yours if the money stays in the company, which is why two owners with the same profit can end up in very different spots depending on how much they spend. Someone who lives on every dollar the business earns sees a much smaller advantage than someone who reinvests half of it in equipment and staff.
Why isn’t the corporate number the whole story?
Because the tax is only the first layer. Leave $88,304 inside the company after tax on $100,000 and it’s still the company’s money. The moment you pay it to yourself as salary or dividends, personal tax follows, and that second bite can be big. Our corporate calculator doesn’t model that step, so it can’t say which route leaves you better off.
The small business rate has limits as well. It applies to Canadian-controlled private corporations, to the first $500,000 of active business income, and the limit is shared with associated companies. At $800,000 the average in our table rises to 17.2% because part of the income is taxed at the general rate. The CRA’s corporation tax rates page shows the federal small business rate at 9% and the general rate at 15%, and our data shows Ontario’s general rate at 11.5%, which combine to 26.5%.
So does the corporation win? Not automatically. It pays off when you can leave profit in the company for years. If you need the cash at home every month, you’ll find the gap shrinks fast.
Which mistakes come up when choosing?
The first is incorporating a business that earns $30,000. You add a yearly T2, accounting and registration work for a saving that may be small. Fee levels for accountants and filings weren’t confirmed here, so get written quotes.
The second is forgetting that a sole proprietor pays both halves of CPP. On $100,000 that is $9,293 in our tool. The third is trusting the self-employed tool too far: its deductions lower income tax but not CPP, and it leaves out EI and GST/HST. Treat it as a first estimate.
The income tax calculator is handy for the salary side, and the dividend tax calculator starts the payout side. For a one-person company that hires staff, the payroll remittance calculator covers what you send the CRA.
Can you change structure later?
Yes, and many owners do. A shop that starts as a sole proprietorship in Moncton can incorporate once profit grows, and a partnership can turn into a corporation too. The catch is that moving assets into a company counts as a transfer for tax purposes, so it takes planning and paperwork. Starting simple and switching when the numbers justify it is often cheaper than incorporating on day one, but a short chat with an accountant before the move is worth a few bucks.
Sources, and how we checked them
The descriptions of each structure come from CRA pages on setting up a business. Corporate rates come from CRA corporation tax rate and Ontario pages, and the personal tax uses 2026 federal and Ontario data in our engine. The Ontario corporate figure for a 2026 calendar year is our own proration. We’re an independent site, and no government body is behind it.
Frequently asked questions
How is a sole proprietorship taxed?
The owner pays personal income tax on the net income of the business. The business has no separate legal status.
Does a corporation file its own return?
Yes. It files a T2 return within six months after its year end, even when it owes no tax.
What is the federal small business rate?
9% on the first $500,000 of active business income for a Canadian-controlled private corporation, according to our data from the CRA.
Is the corporate tax the final tax?
No. Paying salary or dividends to the owner creates personal tax, which our corporate calculator does not model.
Does a corporation limit my liability?
Shareholders are not responsible for the corporation's debts, according to the CRA. A sole proprietor has no such protection.
- Self-employed taxes in Canada: income, CPP and GST
How tax works when you are self-employed in Canada: reporting income and expenses, paying both halves of CPP, instalments and when to register for GST