Freelancers and independent contractors often reach a point where someone, an accountant, a client, a friend who incorporated, suggests they should incorporate themselves. It can be a smart move. It can also be a mistake, and there is one CRA rule in particular that decides which.
Here is what incorporating yourself actually means and what to weigh before you do it.
What incorporating yourself means
It means setting up a corporation that you own and that provides your services. Instead of billing clients personally as a sole proprietor, your corporation contracts with them and gets paid, and you draw income out of the corporation. Legally, you are now working through a company rather than as yourself.
Why freelancers do it
- Limited liability. The corporation, not you personally, generally carries the business's obligations.
- Tax deferral. If you earn more than you need to live on, you can leave the surplus in the corporation, taxed at the lower small business rate, and defer personal tax until you take it out.
- Credibility. Some clients prefer, or require, contracting with an incorporated business rather than an individual.
Income splitting with family used to be a bigger draw, but rules introduced in 2018 limit it in many situations, so treat it as a bonus rather than a reason on its own.
The personal services business trap
This is the rule to understand before anything else. If the CRA decides that you would reasonably be considered an employee of your client if the corporation did not exist, it can treat your corporation as a personal services business. That designation is punishing: the corporation loses the small business deduction, loses most ordinary business deductions, and is taxed at a high rate. It most often catches single-client contractors whose day-to-day looks a lot like employment.
When it makes sense
Incorporating yourself tends to make sense when you have several clients, earn meaningfully more than you spend, and carry real liability. If you are still deciding whether to incorporate at all, our guide on sole proprietorship versus corporation covers the wider trade-offs.
Where Korporex fits
When you and your accountant agree incorporating is the right move, Korporex files your federal or Ontario incorporation online, with the share structure and minute book handled for you.