Business Incorporation

Federal incorporation under the Canada Business Corporations Act gives you nationwide name protection and the right to operate in any province (with extra-provincial registration in each, which costs extra). It's generally pricier upfront and has slightly more onerous ongoing filings, including federal annual returns and director residency requirements (at least 25% Canadian-resident directors). Provincial incorporation (e.g., under the Ontario Business Corporations Act) is usually cheaper, faster, and sufficient if you'll operate within one province. Some provinces no longer have residency requirements for directors. If you're a single-province business and the name isn't in conflict with anyone else nationwide, provincial is often the practical choice. Federal becomes worth the extra cost when nationwide branding or interprovincial operation is the plan.

Common share structures for owner-managers include a combination of voting common shares (control), non-voting common shares (capital appreciation), and dividend-only preferred shares (income flexibility), sometimes held by a family trust to multiply the lifetime capital gains exemption across beneficiaries. The Tax on Split Income (TOSI) rules introduced in 2018 dramatically limit the historical "income splitting" benefit by taxing dividends paid to family members at the top marginal rate unless they meet specific exemptions: actively engaged in the business (averaging 20+ hours per week), owners of "excluded shares" (10%+ ownership of a non-services non-passive business with arm's-length revenue), or aged 65+ for spouse-of-active-owner exemptions. Structuring requires careful analysis of who qualifies for which exemption. Getting it wrong costs the full top-rate TOSI tax on every distribution.

Incorporation typically makes sense when (a) net business income exceeds your personal living needs by enough to leave money inside the corporation taxed at the SBD rate (~12% combined) instead of personal rates (up to ~53%), enabling tax deferral and reinvestment; (b) you have liability exposure that limited liability would mitigate; (c) you want the planning flexibility of choosing salary vs. dividend remuneration; or (d) you're planning a future sale that could qualify for the lifetime capital gains exemption (~$1M+ tax-free on QSBC shares). Counter-points: incorporation costs $1-3k upfront, then $1-3k+ per year in T2 and corporate maintenance fees; losses are trapped in the corporation rather than offsetting your personal income; CPP and RRSP-room considerations differ. For service businesses with all profits drawn out personally each year, the deferral benefit disappears, making sole proprietorship simpler and equivalent in tax cost.

Beyond the T2, a corporation generally must file: (1) an annual corporate Annual Return with the federal or provincial corporate registry (separate from the T2), (2) HST/GST returns if registered (monthly, quarterly, or annually based on revenue), (3) T4 slips and Summary if there are employees, (4) T5 slips for dividends paid to shareholders, (5) provincial payroll filings (e.g., Ontario EHT, WSIB), (6) T1135 if foreign property exceeds $100K cost amount, and (7) maintenance of a corporate minute book recording director and shareholder resolutions. Non-compliance with the annual return can lead to dissolution of the corporation by the registry, a surprisingly common and expensive issue for owners who overlook it.