Is it better to be an incorporated contractor or an employee in Ontario?

Whether it makes sense to incorporate and offer services through your corporation rather than as an employee depends on the nature of your work and what your client actually allows. This is an area where CRA pays close attention.

If you incorporate and provide services to clients primarily through your corporation, you gain potential tax advantages — the small business deduction on corporate income, tax deferral, and some flexibility in compensation structure. You also take on full responsibility for your own CPP contributions, no EI coverage (unless you opt in), no employer benefits, and all your own business costs.

However, CRA watches for what it calls a "personal services business" (PSB). If your corporation basically provides your services to one client and you would be considered an employee if the corporation did not exist, the corporation may be classified as a PSB. PSBs lose access to the small business deduction and many ordinary business expense deductions — defeating much of the tax advantage of incorporating.

Courts and CRA use multi-factor tests to determine whether a relationship is truly independent contracting or disguised employment. Factors include: degree of control, ownership of tools, chance of profit, risk of loss, and integration into the client's business. Both you and your client may want legal and tax advice to structure the relationship properly.