Often terms like “Independent contractor” get associated with “sole-proprietor”, because there is no mandatory requirement to register a sole-proprietorship in Canada, unless you want to have different name or voluntarily register it.
Being as independent contractor, you got a choice should you register as sole-proprietor or Incorporation. This is most common amongst IT people; however, it is gaining traction to other categories as well.
| Sole-proprietor | Incorporation |
| Lower Cost of registration. | Higher cost of incorporation. Cost also depends on complexity addons like restrictions in Articles. |
| Low maintenance – Not much documentation and easy to register. | High maintenance – like drafting Articles, Minute book. |
| Unlimited Liability – it can jeopardise personal assets in case of litigation. | Limited Liability – to the extent of paid-up value of shares. Personal assets are separate than corporation, exceptions permitted. |
| Life is limited to life of the owner, once the owner dies the sole-proprietorship ceased to exist. | Unlimited life – corporation is separate legal entity. The life of corporation depends on share held by shareholders, which can change hands. The corporation dies on dissolution. |
| Tax advantage is limited, the taxable income is taxed as per marginal rates. Higher the net taxable income higher the marginal rate. | Tax rate is fixed, there is no marginal tax rate on incorporation. Tax rate is applied as per categorised income source. |
| There is no tax advantage on Income splitting strategy. | Income splitting is permissible like Dividend, owners’ salary etc. |
Overall, incorporation has better tax advantages than sole proprietor, however, it depends on individual situation and case to case basis. Take an example: If the contract amount is lower and the length of the contract is limited, it is advisable to start with sole proprietorship than with incorporation considering the cost of registering an incorporation and maintenance is too high for corporation. Similarly, if the owner is single / unmarried the opportunity of splitting income is of no use.
Unless you are not sure about which route you are taking, it is advisable to have CPA Accountant to take care of your books and all tax planning matters. Here we can help, as CPA team each member is highly qualified to perform complex tax structures to guide the client as required. Contact us at 647-800-3097 / email us info@orientaccounting.ca today ! and talk to our CPA for free consultation