When you incorporate, you gain several tools which will help you reduce your taxes as a small business owner. In Canada, the tax rate on corporations is lower than the tax rate for individuals. Whenever you can leave some money in the corporation, you can reduce the taxes you pay. You also have the flexibility of choosing how you get paid. You can pay yourself in salary, dividends, or a combination of both depending on what will result in the lowest tax burden.
If your corporation is owned by Canadian citizens or residents, you will gain further tax benefits available to Canadian Controlled Private Corporations (CCPCs) including the Small Business Deduction.
For example, in Ontario, an incorporated business pays a tax rate of 13.5% on the first $500,000 of income each year, and 26.5% for all income beyond that. As a business owner, if you are able to leave money in the company, and not take it all out for personal expenses, you can increase the value of your company’s assets. This means that the money you leave in your company could be used to invest back into the business: for example, to spend on marketing, buy new equipment, purchase additional inventory or hire new staff.