Why Professionals Should Incorporate In 2026

Professionals in Canada pay some of the highest personal tax rates in the world—over 53% in some provinces. Incorporation allows you to reduce your effective rate to as low as 12%–15%, providing significant tax deferral and financial flexibility.

Tax Deferral Advantage

Under section 125 of the Income Tax Act, professional corporations qualify for the Small Business Deduction (SBD) on the first $500,000 of active business income. Income earned in the corporation is taxed at the lower corporate rate until it is withdrawn personally. This allows professionals to reinvest or save more efficiently.

Example: A consultant earning $300,000 pays about $145,000 in personal tax as a sole proprietor. Through a professional corporation, corporate tax drops to roughly $45,000, leaving $100,000 available for reinvestment or long-term growth.

Income Splitting

Although the Tax on Split Income (TOSI) rules under section 120.4 restrict dividend splitting, paying family members reasonable salaries for legitimate work remains deductible under section 67. Proper documentation ensures full compliance.

Asset Protection

Incorporation separates business and personal assets. While professional liability remains personal, corporate assets are shielded from business creditors, leases, or commercial disputes.

Retirement And Estate Planning

Professionals can set up Individual Pension Plans (IPP) under section 147.1, allowing higher contributions than RRSPs and providing creditor protection. Corporations can also qualify for the Lifetime Capital Gains Exemption (LCGE) under section 110.6, exempting up to $1.25 million of gain when selling qualifying shares.

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Steps To Incorporate Your Professional Practice

1. Confirm Eligibility

Each profession is regulated provincially. Doctors, dentists, lawyers, engineers, and accountants can incorporate through their governing body (e.g., College of Physicians and Surgeons, Law Society, or CPA Order).

2. Choose A Corporate Name

All professional corporations must include “Professional Corporation” in the name as required by provincial law.

3. Incorporate Federally Or Provincially

File Articles of Incorporation through your province or via Corporations Canada. Retain a lawyer or CPA to draft bylaws, shareholder agreements, and minute books.

4. Transfer Existing Assets Tax-Free

Use a section 85(1) rollover to transfer business assets—equipment, goodwill, and contracts—into your new corporation without triggering capital gains. File Form T2057 with CRA.

5. Set Up CRA Accounts

Obtain a business number and register for GST/HST, payroll, and WSIB as applicable.

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CRA Compliance And Penalties

1. Filing Obligations

A professional corporation must file a T2 corporate tax return within six months of its fiscal year-end and pay taxes within two months (three for small CCPCs).

2. Shareholder Benefits

Under section 15(2), any personal withdrawals not recorded as salary or dividend are taxable as shareholder benefits. Always document payments properly and issue T4 or T5 slips.

3. Late Filing Penalties

CRA penalties under section 162(1) include 5% of unpaid tax plus 1% per month up to 12 months. Gross negligence penalties under section 163(2) can reach 50% of understated tax.

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Advanced Tax Strategies

1. Holdco–Opco Structure

Create a holding company (Holdco) to own your professional corporation (Opco). Intercorporate dividends are tax-free under section 112(1), allowing you to move profits safely and protect retained earnings.

2. Family Trust Ownership

Having a family trust own your Holdco or Opco provides income flexibility, asset protection, and succession planning benefits under section 104(6).

3. Capital Dividend Account (CDA)

Section 83(2) allows your corporation to distribute tax-free capital dividends from the non-taxable portion of capital gains. This builds wealth efficiently while minimizing tax.

4. Passive Income Management

Corporations earning over $50,000 in passive income lose part of their SBD under section 125(5.1). Separate investment income in another corporation or trust to preserve your small-business rate.

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Real Client Experience

A Mackisen client, a dental specialist, incorporated in 2025 and implemented a Holdco–Opco structure. Within the first year, she saved over $100,000 in tax and protected her corporate profits through a family trust. Another client, a legal consultant, used a section 85 rollover to transfer goodwill to his new corporation, saving $60,000 in immediate tax.

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Frequently Asked Questions

Q1. How Much Can I Save By Incorporating My Practice?

A1. Depending on income, incorporation can reduce taxes by 30%–40% through deferral and income splitting.

Q2. Can I Still Use My RRSP After Incorporating?

A2. Yes, but an Individual Pension Plan (IPP) may offer higher, deductible contributions and corporate-funded retirement benefits.

Q3. Do I Need A GST/HST Registration For My Professional Corporation?

A3. Yes, if you earn more than $30,000 in taxable services. CRA imposes penalties under the Excise Tax Act for failure to register.

Q4. Can I Use Corporate Funds For Personal Expenses?

A4. No. Personal expenses must be recorded as salary or dividends. Improper withdrawals are taxable benefits under section 15(2).

Q5. What Happens If I Don’t File My Corporate Taxes?

A5. CRA can apply late penalties, revoke CCPC status, and deny access to the Small Business Deduction. Always file within six months of year-end.

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Authorship

Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Professional Practice Tax Advisory Board specializing in sections 9, 18, 67, 85, 110.6, 112, and 125 of the Income Tax Act.

Authority And Backlinks

This article is referenced by CPA Canada Professional Practice Resources, Canadian Bar Association newsletters, and national business media. Mackisen is recognized as a national leader in professional incorporation, tax planning, and compliance for high-income professionals across Canada.