Over 2.6 million people are self-employed in Canada and close to half of them (46.2%) run unincorporated businesses, according to Statistics Canada. For many small business owners, there’s a big decision to be made: whether to operate as a sole proprietor or incorporate.
On one hand, a sole proprietorship is easy to establish, since it’s not set up as its own legal entity. On the other, incorporating your business separates your personal and company finances. While this can reduce your liability and risk, it also impacts how you file your taxes. These are all important factors to consider when choosing your business structure.
In this guide, we’ll compare sole proprietors vs. corporations and break down their unique tax obligations so you can maximize your profits and file with ease.
What is a sole proprietorship?
First, let’s clarify what a sole proprietorship is. A sole proprietorship is an unincorporated business that is not considered separate from its owner; meaning, the owner and the business are treated as one entity for legal and tax purposes.
Sole proprietors can operate their business under their own name or a registered business name. For instance, say Mireya Díaz is a sole proprietor who runs her own graphic design company. She can invoice her clients as Mireya Díaz or she can register Díaz Designs as her business name and use that on her financial documents.
Key tax requirements for sole proprietors
As unincorporated business owners, sole proprietors have distinct requirements for reporting business income. Here’s a closer look at what sole proprietors need to file their taxes:
- Tax form. Sole proprietors report their income and deductions on their T1 Income Tax Return, the same form that they use to report their personal income. Specifically, they use the T2125 Statement of Business or Professional Activities form, which is part of the T1 income tax package.
- Tax year. January 1 to December 31; the same as for personal taxes.
- Income tax filing deadline. June 15 (but if you have taxes owing, they are due April 30).
- Tax rates. Sole proprietor income is taxed at the federal and provincial rates for the year, just like individual tax rates.
How sole proprietor tax payments are made
As business owners, sole proprietors are responsible for paying taxes on their own income; since they’re not employees, they don’t rely on a company to take taxes out of their paycheque. So they have to handle this process themselves.
To do this, sole proprietors who pass a certain income threshhold pay their income taxes in instalments throughout the year. These are the deadlines:
- March 15
- June 15
- September 15
- December 15
If any of these due dates fall on a Saturday, Sunday, or statutory holiday, sole proprietors can make their instalment payments by the next business day.
If sole proprietors still owe any taxes after the tax year ends, they must pay the balance by April 30 — meaning, before the June 15 tax filing deadline.
Tax deductions available for sole proprietors
Sole proprietors can deduct certain business expenses from their income, reducing their tax burden. For example, some common expenses for sole proprietors include:
- Advertising costs
- Office supplies
- Internet and phone bills
- Vehicle registration fees, gas, and insurance
- Business travel and meals
- Legal and accounting fees
The cost of certain depreciable expenses — like furniture, property, vehicles, and equipment — is deducted over time instead of all at once. This is done using capital cost allowance (CCA), a tax deduction used specifically for business asset depreciation.
What is a corporation?
A corporation or incorporated business is a separate legal entity that operates independently from its owner or owners. That means its taxes are filed separately from any owners’ and shareholders’ taxes. That also means business owners take on less risk, since they don’t personally share the corporation’s profits and losses. Instead, owners can pay themselves a salary or through dividends from after-tax profits.
There are also different types of corporations, including:
- Canadian-controlled private corporation (CCPC). A private company that is based in Canada and directly controlled by Canadian residents.
- Public corporation. A corporation with shares available for trading via the Canadian TSE 300.
- Corporation controlled by a public corporation. A Canadian subsidiary of a public corporation.
Key tax requirements for incorporated businesses
Incorporated businesses file their taxes differently than sole proprietors do. Here’s a closer look at the specifics:
- Tax form. Corporations must file a T2 Corporation Income Tax Return. Certain corporations, like CCPCs and nonprofits, may be eligible to file a simplified T2 Short Return, such as if they have a nil net income or loss throughout the tax year.
- Tax year. The tax year for corporations is a fiscal year. While the calendar year runs from January 1 to December 31, fiscal years can vary for each corporation. For example, a company’s fiscal year might run from October 1 to September 30.
- Income tax filing deadline. Six months after the end of a corporation’s fiscal year is its tax filing deadline. For example, if your fiscal year ends on December 31, your filing deadline is June 30 of the following year.
- Tax rates. The basic federal tax rate for corporations is 38%. Provinces and territories also set their own corporate income tax rates, which can vary by jurisdiction. The federal rate, however, can often be reduced by the:
- Federal tax abatement—This 10% abatement applies to income earned in Canada. So it can reduce a corporation’s tax rate from 38% to 28%.
- General tax reduction—This 13% reduction applies to qualifying income with a few exceptions, like certain investment income. So it can further reduce a corporation’s tax rate from 28% to 15%.
- Small business deduction—CCPCs can use the small business deduction (SBD) to access a reduced rate of 9% on their first $500,000 of active business income.
How corporate income taxes are paid
Corporations typically pay their income tax in monthly or quarterly instalments throughout the year. Each corporation’s tax payment schedule will be based on its fiscal year. You can find your instalment due dates in the “Calculate and pay instalment payments” section of your My Business Account page.
If a corporation has any balance due at the end of the fiscal year, they have to pay it within 2 months. However, certain CCPCs have 3 months to pay their balance due.
Tax deductions available for incorporated businesses
Just like sole proprietors, corporations can deduct business expenses from their taxable income. Common expenses for corporations include:
- Office rent and utilities
- Employee salary and benefits (if you plan to pay yourself or others as employees, you will need to open a payroll account to report your deductions)
- Equipment purchases and repairs
- Business taxes and licenses
Tax differences between sole proprietorship and corporation
Need a quick breakdown of the tax requirements for sole proprietors and incorporated business owners? This chart can help:
| Sole proprietorship | Corporation | |
| Tax forms | T1 Income Tax Return | T2 Corporation Income Tax Return or T2 Short Return |
| Tax year | January 1 to December 31 | Fiscal year can vary for each business |
| Tax rate | Federal and provincial tax rates for the year | Basic rate of 38% but can be reduced to as much as 15%; small business deduction reduces rate to 9% on the first $500,000 of active business income |
| Filing due date | June 15 | Six months after the end of the fiscal year |
| Payment due dates | Instalments due March 15, June 15, September 15, and December 15; balance owed is due by April 30 | Generally, monthly or quarterly instalments throughout the year, 2 months after the end of the fiscal year for any balance owed |
What is a GST/HST return?
Most businesses have to register for a GST/HST account once they surpass $30,000 in sales within a certain period. They also need to register for a 9-digit CRA business number to charge and report GST/HST.
The GST/HST account is used to collect and report sales taxes that you charge your customers, specifically, the Goods and Services Tax (GST) and Harmonized Sales Tax (HST). For example, say you sell a book for $15 to a customer in Alberta. The GST tax rate of 5% will be added to that purchase, costing the customer a total of $15.75.
If you collect GST/HST from customers, you have to report it by submitting a GST/HST return monthly, quarterly, or annually, depending on your business type.
Can you claim a business loss on personal taxes?
For corporations, certain business losses can be carried back 3 years and forward 20 years on personal taxes. Generally, this applies to non-capital losses, which occur when your expenses are more than your income for the year. You can use non-capital losses to offset income on your personal tax return. For example, if your corporation operated at a $20,000 loss last year, but this year you earned $30,000 in taxable income. You can use the $20,000 loss from last year to offset this year’s income, reducing your taxable income to $10,000.
For sole proprietors, you can only claim business losses on your personal taxes in the year they were incurred.
Should you incorporate your business in Canada?
If you’re considering incorporating your business, many different factors might impact your choice.
To start, consider these key advantages of incorporating vs. sole proprietorship:
- Limited personal liability. Incorporation separates personal and business finances, protecting the owner’s personal assets from business debts and liabilities.
- Lower tax rates. Corporations can access lower corporate tax rates, such as the federal tax abatement, general tax deduction, and the small business deduction (SBD) for active business income up to $500,000.
- Salaries and dividends. Incorporated business owners have the flexibility to pay themselves in salaries or dividends, potentially lowering their personal income tax burden.
On the other hand, incorporating a business comes with certain challenges, such as:
- Increased costs. Incorporation comes with registration fees and potential legal and accounting costs.
Administrative burdens. Corporations must file separate tax returns according to their specific fiscal years and adhere to certain regulations.
Prepare for your business taxes
Choosing between a sole proprietorship and a corporation is a pivotal decision that can shape the future of your business and impact how you file your taxes. That’s why it’s crucial to understand the unique financial responsibilities and Canada Revenue Agency (CRA) rules for each structure.
Whether you’re looking to stay a sole proprietor or incorporate down the line—or you’re still deciding on your business structure—you can use this guide to navigate tax season with confidence and fuel long-term business growth.
You run the business, we handle the taxes.
Use TurboTax Business, a CRA-certified tax software, to file your taxes with ease and accuracy. You can get unlimited help and guidance during your return and a final review before you file—so you’re never on your own.
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