Should You Incorporate Your Freelance Business? – A Complete Guide by a Montreal CPA Firm Near You

One of the most common questions freelancers and self-employed Canadians ask is:

Should I incorporate my business?

For consultants, contractors, creatives, IT specialists, health practitioners, tradespeople,

gig workers, and online entrepreneurs, incorporation offers potential tax advantages,

limited liability, increased credibility—and sometimes major administrative costs with

little benefit. Incorporation is not a one-size-fits-all decision. The right time depends on

income level, tax planning opportunities, liability exposure, client expectations, and long-

term growth. Incorporating too early can create unnecessary accounting fees and

compliance obligations. Incorporating too late can lead to missed tax deferral

opportunities or avoidable personal risk. This guide explains exactly when freelancers

should incorporate in Canada, what the legal and tax consequences are, and how to

decide based on your business goals.

Legal and Regulatory Framework

Incorporation is governed by the Canada Business Corporations Act (CBCA) or

provincial statutes such as the Québec Business Corporations Act, Ontario

Business Corporations Act, or BC’s Business Corporations Act. Incorporated

businesses become separate legal entities responsible for filing their own T2 corporate

tax returns, maintaining minute books, issuing shares, and complying with shareholder

and officer rules.

From a tax perspective, corporate taxation is governed by the Income Tax Act. Key

provisions include:

• Corporate tax rates — CCPCs benefit from the Small Business Deduction on the

first $500,000 of active business income.

• Tax deferral — corporations may retain earnings at lower tax rates, allowing

investments through the company.

• Owner compensation — income can be paid as salary or dividends.

• Limited liability — shareholders generally are not personally liable for corporate

debts, except for certain tax obligations.

• GST/HST & QST rules — incorporation may affect registration obligations.

• Payroll — corporations must register a payroll account if paying salary.

These rules define the legal structure freelancers must consider when evaluating

incorporation.

Key Court Decisions

Several court decisions illustrate how incorporation affects tax and legal responsibilities.

In Neuman v. Canada, the Supreme Court confirmed that income splitting using a

corporation must be based on actual business involvement, affecting how freelancers

structure dividends.

In McClarty v. Canada, the court emphasized the importance of recognizing a

corporation as a separate taxable entity with its own obligations, reinforcing the need for

proper documentation and corporate governance.

In Walls v. Canada, CRA challenged a taxpayer who used corporate structures to avoid

GST/HST obligations. The court upheld CRA’s strict interpretation of registration rules.

In Soper v. Canada, directors were found personally liable for unremitted payroll

deductions, highlighting that incorporation does not remove all personal exposure.

These cases show that incorporating creates opportunities—but also heightened

compliance responsibilities.

Why CRA Targets This Issue

CRA closely scrutinizes freelancers who incorporate because incorporation is often

used incorrectly to avoid personal tax or shift income. CRA specifically targets:

• corporations paying dividends to family members without meeting TOSI rules

• freelancers who incorporate but continue depositing business income into personal

accounts

• inaccurate T2 filings from first-year corporations

• misuse of shareholder loan accounts

• personal expenses run through corporations

• freelancers who fail to register payroll correctly when paying themselves a salary

CRA also monitors GST/HST compliance when freelancers switch from sole

proprietorship to corporation but fail to update tax accounts. Understanding these risks

is essential before incorporating.

Mackisen Strategy

At Mackisen CPA Montreal, we help freelancers decide whether incorporation is right for

them based on a clear, structured analysis. Our evaluation includes:

• reviewing your annual and projected income levels

• determining whether tax deferral is meaningful in your situation

• assessing risk exposure and whether limited liability is needed

• analyzing whether clients prefer to work with incorporated contractors

• calculating the administrative and bookkeeping costs of incorporation

• projecting long-term financial outcomes for both structures

• planning optimal salary/dividend mixes if incorporation is chosen

• advising on GST/HST and payroll setup for new corporations

• preparing incorporation documents, share structures, and corporate resolutions

Our approach ensures independent professionals incorporate only when it is financially

and operationally beneficial.

Real Client Experience

A freelance software engineer earning $180,000 annually was paying high personal tax

as a sole proprietor. We incorporated her business, structured compensation through a

mix of dividends and salary, and reduced her overall tax burden significantly while

creating room for tax-advantaged corporate investments.

Another client, a photographer earning under $45,000 annually, thought incorporation

would save tax. After analysis, we advised remaining a sole proprietor due to low

income and limited tax deferral benefits. Avoiding incorporation saved him thousands in

unnecessary annual fees.

A health and wellness consultant incorporating prematurely ran personal expenses

through the corporation, triggering CRA scrutiny. We reorganized her bookkeeping,

corrected filings, and implemented clean compensation and expense policies.

These examples demonstrate that timing and structure are crucial when incorporating a

freelance business.

Common Questions

Freelancers often ask whether incorporation automatically reduces taxes. It does only if

you can leave money in the corporation.

Others ask whether incorporation protects personal assets. It generally does, but not

from CRA payroll or GST/HST liabilities.

Some ask when incorporation becomes worthwhile. Typically when net income exceeds

$80,000–$100,000, or sooner if liability risk is high.

Another question: Does incorporation help with CPP? Paying yourself dividends avoids

CPP—useful for some, harmful for others depending on retirement planning.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

freelancers and consultants determine the perfect moment to incorporate and structure

their business tax-efficiently. Whether your business is growing or you are analyzing

future opportunities, our expert team ensures precision, compliance, and optimal long-

term financial planning.