“You should incorporate, the tax rate is only 11%.” Every sole proprietor in BC has heard some version of this. The number is right and the advice is incomplete, because the 11% rate only matters if the money stays in the corporation.
The core principle: deferral, not savings
A BC corporation pays 11% combined tax on its first $500,000 of active business income. But you can’t spend the corporation’s money on groceries. The moment you pay yourself, whether salary or dividends, personal tax applies, and thanks to integration the total tax on money you extract lands near what you’d have paid as a sole proprietor anyway.
So the real benefit of incorporation is deferral. The gap between the 11% corporate rate and your personal marginal rate applies only to money you leave in the company. If you earn $300,000 and spend $290,000, incorporation does almost nothing for you tax-wise. If you earn $300,000 and live on $120,000, roughly $180,000 a year compounds inside the corporation having lost only 11% to tax instead of 40% or more. Over a decade that difference is enormous.
The test in one sentence: do you reliably earn more than you spend? If yes, incorporation likely pays. If no, it’s mostly cost and paperwork, with a few exceptions below.
The non-tax reasons that override the math
Liability is the big one. If your business can get sued, incorporating puts a wall between the business’s obligations and your house. Contractors, anyone with employees, anyone signing significant contracts: the liability answer often decides the question before tax enters the picture. Some clients also simply require you to be incorporated to get on their vendor list.
There’s also the lifetime capital gains exemption. If you might one day sell the business, shares of a qualifying small business corporation can shelter over $1.25 million of gains per shareholder. Sole proprietors don’t get this.
The costs people forget
Incorporation isn’t free. Figure $350 to $400 to incorporate in BC, more with a lawyer, which I’d recommend if there’s more than one shareholder. Then every year: a separate T2 corporate return, financial statements, an annual report filing, and a payroll or T5 process to pay yourself. Realistically budget $2,500 to $5,000 a year in accounting and compliance that a sole proprietor doesn’t pay. That’s the hurdle your deferral benefit has to clear.
Where the line sits
A sole proprietor netting under about $100K and spending most of it should usually stay unincorporated unless liability forces the issue. Between $100K and $150K it depends almost entirely on your savings rate. Above $150K with meaningful retained earnings, incorporation usually wins comfortably. The deferral covers the compliance costs many times over.
One warning: incorporation is much easier to enter than to exit. Winding up a corporation with accumulated assets has its own tax consequences. Don’t incorporate for a hypothetical. Incorporate when the math or the liability picture says so.
General information about how the rules work. Your situation will turn on its own facts, and the figures above move with your province, your income mix and the year. Have someone run your numbers.