After finally incorporating in Canada and spending a year taking on independent projects, I recently received notice from the CRA that my corporate tax assessment had gone through. At this point, I’ve basically walked through the full set of steps involved in setting up and running a company here, at least from the perspective of a one-person business, so it feels like a good time to lay it all out.

Registering the business

The registration part was surprisingly easy.

There are plenty of services online that offer packaged business registration for a few hundred dollars. They may be convenient, but honestly, they’re not necessary. The Canadian government already provides a fairly complete online registration process, and it’s also the cheapest route.

Canada offers several business structures: federal or provincial/territorial corporations, sole proprietorships, partnerships, and cooperatives. The government site explains what each one is for and when it makes sense.

If all you need is a simple way to invoice as a contractor and you have no intention of expanding, a sole proprietorship is the easiest option. The tradeoff is that it’s tied directly to you as an individual, with unlimited liability. Once your income gets higher, there also isn’t much tax flexibility beyond deducting eligible business expenses.

I, on the other hand, had bigger small-business dreams. Even if I was only doing contract work at the time, I kept imagining that maybe after making some money I’d branch out into other things, grow a bit, maybe even create a few jobs. I also didn’t want to feel limited to a single province. So I registered a federal corporation right away.

That decision cost me 213 CAD total: 200 CAD for incorporation and 13 CAD for the name search. Even with a federal corporation, you still need to choose the province where the business will operate. A provincial corporation may offer somewhat better privacy, though I haven’t personally gone through that route, so I can’t say exactly how that difference shows up in practice.

Useful government pages:

• Federal incorporation: https://www.canada.ca/en/services/business/start/register-with-gov/register-corp/register-corp-fed.html
• Ontario business registration: https://www.ontario.ca/page/registering-your-business-name
• Business expenses: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses.html

In general, the government sites are clearer than people expect. I sometimes tried asking an accountant just to save time, but unless they specialize in exactly the thing you’re asking about, they often end up checking the government website too and then explaining it back to you.

Why I chose a corporation

I registered a standard corporation rather than operating as a sole proprietor, so the rest of this mostly applies to corporations.

The tax flexibility of a corporation, as I see it, comes down to two main things.

1. Some expenses can be paid with pre-tax business money

Reasonable business expenses reduce revenue and therefore reduce tax.

The key word is reasonable. If I run a software engineering company, buying gym equipment through the business would be hard to justify. But servers, domains, computers, and other electronics are much more obviously connected to the business.

Take a simple example. If someone in Ontario earned 100k CAD in 2021, the average tax rate would be 27.08% and the marginal rate 43.41%. If I need to spend 400 CAD on servers for the year and I pay that out of personal after-tax income, then earning the pre-tax money needed to cover that expense might really mean making something like 600–700 CAD first. If that same 400 CAD is a legitimate business expense, then it stays a 400 CAD pre-tax expense. That difference is not trivial.

2. Tax deferral

This part is even more intuitive.

My personal marginal income tax rate is already above 40%, while Ontario’s small business corporate rate is 11.5%. So if I personally earn another 100 CAD, more than 40 CAD of that may go to tax, leaving only about half. If that same 100 CAD stays in the company, the business pays 11.5% tax and keeps 88.5 CAD.

That money can then be used gradually for business-related spending, or it can be paid out later in a year when my personal income is lower—for example, if I quit working for a while or retire. In a lower-income year, the personal tax on money taken from the corporation may also be lower.

Of course, the 11.5% small business rate in Ontario has limits. Rates differ slightly across provinces, but usually only by a few percentage points. The small business rate generally applies when annual active business income is under 500,000 CAD. Passive income like rental property income or stock trading gains does not qualify the same way.

There are downsides too. The clean separation between the company and the individual is part of the point, but it also means corporate income is not the same as your personal income. For example, when applying for a mortgage, a bank will typically look at the income shown on your personal tax return. Money sitting in the corporation does not automatically count the way salary or other personal income does.

If the business becomes very profitable, there are more advanced strategies available, but that’s outside the scope of my current situation.

Canada also has RRSPs as tax-deferred accounts, but they come with contribution limits. In a loose sense, the small business tax rate can feel like having access to a much larger tax-deferral vehicle.

For tax rates, this site is very useful:

• https://www.taxtips.ca/
• Personal tax rates: https://www.taxtips.ca/marginal-tax-rates-in-canada.htm
• Corporate tax rates: https://www.taxtips.ca/smallbusiness/corporatetax.htm
• Ontario personal tax calculator: https://www.wealthsimple.com/en-ca/tool/tax-calculator/ontario

Banking, bookkeeping, and keeping everything separate

Business bank account

A business account is not strictly mandatory for a small corporation, but in practice life gets much harder without one. It’s also much better for bookkeeping and taxes if personal and corporate finances are kept clearly separate.

And this is where Canadian banking starts to feel especially irritating.

Personal banking fees here are already not exactly cheap, but once you move into business banking, every step starts to feel like a cash grab. All the major banks offer business accounts with different plans depending on your needs. Searching for a bank name plus "business account plan" usually brings up a pretty clear breakdown.

If your income is mostly online—for example, IT work—and you rarely handle cash or cheques, many banks offer no-monthly-fee options. But if you start doing more Interac e-Transfers, fees can climb fast. Paper cheques cost even more, though ordering them in bulk and using a third-party supplier can sometimes be cheaper.

If your business is fully online, you mostly get paid electronically, spend by card, and rarely transfer money out to others, a zero-fee plan can be enough. If you have more frequent small transfers, then a 5–6 CAD monthly plan may already be more practical. If you run a physical business or need POS processing, then the right account depends much more heavily on transaction volume.

Business account fees, accounting fees, tax filing fees, and occasional consultations all count as business expenses too. Incorporating gives you some tax flexibility, but if your real-life situation doesn’t benefit much from that flexibility—or the savings are too small—then the corporate route may not be worth the extra hassle.

Bookkeeping

Technically, you are not forced to keep day-to-day books in some formal system, but if you don’t, tax time becomes much more painful.

The easiest setup is to use bookkeeping software connected directly to your bank account. Transactions can be pulled in automatically, and then all you need to do is review them, categorize them, and add notes where useful.

If you search for bookkeeping services in Canada, you’ll find plenty of options. QuickBooks is one of the most widely used and comes from Intuit. People may know Intuit from other products as well.

QuickBooks does much more than bookkeeping. If your company actually employs people, it also offers payroll features. Payroll is not just about sending money to employees; it also involves CPP/EI, possibly HST/GST, and annual tax slips. You can do that manually, but it doesn’t seem like a great use of time.

The main drawback of QuickBooks is simple: it’s expensive. There are cheaper plans if you only need the basics, but since I had access to a free alternative, I didn’t look into it too deeply.

I use Waveapps, a Canadian startup product. My needs are very simple: no payroll, no complex operations, just straightforward IT consulting income and the occasional electronics-related expense. For that kind of setup, Wave’s bookkeeping features are free, and charges only start when payroll enters the picture, so I happily took the free version.

Bookkeeping itself hasn’t been complicated. I linked the corporate bank account to Wave, it imported all income and spending automatically, and every so often I go back in, double-check the records, add descriptions, and make sure everything is categorized properly.

Filing taxes

I ended up writing about all this because I just finished the year’s tax filing.

A friend introduced me to an accountant to handle the corporate return. From what I’ve heard, for a one-person operation like mine, annual corporate tax filing usually costs somewhere in the 500–2000 CAD range. If your books are tidy and the accountant doesn’t need to spend much time cleaning things up, it tends to be cheaper.

Since I had already tracked my transactions in Wave, the accountant only needed to prepare the financial statements and tax forms. On top of that, I also asked for help with various forms during the year, and there were software costs as well. Altogether, my 2021 corporate filing costs came to about 1200 CAD.

As for personal taxes, I’ve done my own returns ever since moving to Canada. I use SimpleTax, now under Wealthsimple. I also registered for a CRA online account, which is optional but very useful. Once linked to the tax software, a lot of tax slips can be pulled in automatically instead of being entered manually—for example, T4 slips from employers and T5 slips for investment income. If you have other things going on, like rental property income, you still need to fill in additional forms yourself.

My personal taxes are fairly simple, so after filing through SimpleTax I paid 30 CAD for the support option, mainly for peace of mind in case the CRA selected the return for review and I needed guidance preparing documents.

I also created a CRA online account for the corporation. That makes it easier to look up filed documents later and to set up installment payments if needed.

I submitted the company’s T2 return at the end of February. Since it was my first year filing corporate tax, the CRA called me to confirm some basic information. By mid-March, I could see that the filing had been updated and accepted. There was no extra audit, and the only thing left was paying what was owed. That was more or less the end of my 2021 business year.

A few other things that matter

One important rule: if your sales exceed 30k over four consecutive quarters, you are generally required to register for and charge HST/GST.

In Ontario, that rate is 13%. So if I were working as a contractor for a company at 100 per hour, I would need to bill 113, with the extra 13% collected and later remitted to the CRA.

By accident, I avoided dealing with this because my clients were all U.S. companies, which meant my work counted as exported services. That also means I can’t claim back the HST/GST paid on my own business expenses in the usual way, but given that U.S. clients were paying better, I wasn’t too bothered.

Tax reporting between Canada and the U.S. is very transparent. If you work for a U.S. company as an individual, you typically fill out a W-8 BEN form. If you’re billing through a corporation, the form is W-8 BEN-e. That form is used to confirm the identity of the beneficial owner and the nature of the company. Most accountants are very familiar with it and can get it done in about 20 minutes. After that, if another client needs the same form, you can usually just follow the same selections.

For me, none of this turned out to be especially mysterious. The administrative overhead is real, and some parts are annoyingly expensive, but the process itself is manageable if your business structure is simple and you keep records from the beginning.