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Self-employed or incorporated: when to incorporate?

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You are self-employed and your profit is growing. Here is what incorporation changes for your taxes and your obligations, with 2026 figures.

Three key points

  • Tax deferral. Profit left in the corporation is taxed at the corporate rate. Personal tax applies when you withdraw it.
  • How you withdraw. Salary and dividends are taxed differently. The gap depends on your income and on the corporation’s tax rate.
  • Obligations. A corporation adds two income tax returns, annual fees, separate accounting and liability for its directors.

Tax deferral

A business corporation is a separate taxpayer. For a Canadian-controlled private corporation, the combined federal and Québec rates for 2026 on the first $500,000 of active business income are as follows:

  • 20.5% for a self-employed person who incorporates alone: 9% federally, after the small business deduction, and 11.5% in Québec, at the general rate;
  • 12.2% when the corporation and its associated corporations total at least 5,500 paid hours in the year: Québec then grants its small business deduction, and the Québec rate drops to 3.2%.

The owner’s hours count, up to 2,080 per year. For a majority shareholder, they count even without a salary. Between 5,000 and 5,500 hours, the Québec reduced rate applies in part.

On April 29, 2026, Québec announced a cut of this reduced rate to 2.2%: the 12.2% combined rate would become 11.2%. The measure targets taxation years beginning after April 29, 2026. For most corporations, the effect will only show on the 2027 return.

On the next dollar earned, an individual at the top marginal rate pays 53.31%. Profit left in the corporation pays only corporate tax; personal tax waits until withdrawal. This delay is the tax deferral.

Salary or dividend

  • Salary is deductible from the corporation’s income: it reduces the profit on which the corporation pays tax. It is taxed in your hands at your marginal rate.
  • A dividend is paid out of the corporation’s after-tax profit. The dividend tax credit reduces the shareholder’s tax, because the corporation has already paid tax on that profit. Profit taxed at the small business rate gives rise to a non-eligible dividend.

The two illustrations below are for a $100 payment, at 2026 combined rates.

On $100 of profit At the top rate At 36.12% (taxable income of about $80,000)
Salary: personal tax 53.31% 36.12%
Salary: in your pocket $46.69 $63.88
Dividend: corporate tax (20.5%) $20.50 $20.50
Non-eligible dividend: personal tax, after the dividend tax credit 48.70% 28.93%
Dividend: in your pocket $40.78 $56.50
Dividend with 5,500 paid hours (12.2%): in your pocket $45.04 $62.40

These amounts are before contributions. Salary triggers contributions to the Québec Pension Plan (QPP), the Québec Parental Insurance Plan (QPIP), the Health Services Fund (HSF) and the Commission des normes, de l’équité, de la santé et de la sécurité du travail (CNESST). They are significant at an income of $80,000. In return, salary creates registered retirement savings plan (RRSP) contribution room and a QPP pension.

The refundable dividend tax on hand (RDTOH) returns to the corporation part of the tax paid on its investment income when it pays a dividend. It does not apply to business income.

What the corporation adds

  • Two income tax returns. The T2 federally and the CO-17 in Québec, every year, even without activity.
  • Fees to the Registraire des entreprises du Québec (Québec enterprise registrar). $397 at incorporation, then $106 per year with the annual updating declaration (2026 regular fees).
  • Separate accounting. A bank account, books and financial statements belonging to the corporation.
  • Directors’ liability. Directors can be held personally liable for source deductions and taxes the corporation did not remit. This liability ends two years after they cease to be directors.

Fictional case: Julie

Julie, a self-employed designer, earns a profit of $110,000 and draws $75,000 to live on. The $35,000 she leaves in the business each year makes incorporation worth considering for her.

Assumptions: 2026 parameters; Julie has no other income; as a self-employed person, her taxable income equals her profit; as a corporation, she pays herself a $75,000 salary and the corporation keeps a taxable profit of $35,000; she works alone, under 5,000 paid hours, so at the 20.5% rate; social contributions and personal tax credits are left aside.

Self-employed, the $35,000 is taxed at her marginal rates:

  • $33,680, from $75,000 to $108,680, at a marginal rate of 36.12%: $12,165;
  • $1,320, from $108,680 to $110,000, at a marginal rate of 41.12%: $543;
  • personal tax on the $35,000: $12,708, leaving $22,292 to invest.

Incorporated, the same $35,000 pays corporate tax:

  • $35,000 at 20.5%: $7,175, leaving $27,825 to invest in the corporation.

The deferral is $5,533 for the year.

The deferred tax remains payable on withdrawal. If Julie later pays herself the $27,825 as a non-eligible dividend, at a rate of 28.93%, she pays $8,050 of personal tax, at 2026 rates. Total tax then reaches $15,225, which is $2,517 more than as a self-employed person.

For a self-employed person alone, whose corporation pays 20.5%, the advantage therefore comes from time: the longer the money stays in the corporation, the more the deferral is worth. It also depends on Julie’s marginal rate in the year of withdrawal.

Québec also announced a cut to the dividend tax credit for non-eligible dividends, from 3.42% to 2.69% of the grossed-up dividend, for dividends received after December 31, 2026. If implemented, the tax on this withdrawal will be slightly higher.

The golden rule

Incorporation becomes useful when three conditions overlap: profit above your needs, a real tax deferral and a plan to sell the shares. The sale of shares and the lifetime capital gains exemption will be covered in a future publication.

“Whether to incorporate is a question of facts, but the golden rule remains: if you need all the money your business generates, do not incorporate.”

General information; this is not tax advice.

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