What's the tax difference between operating as a sole proprietor versus incorporating in Ontario?

A sole proprietor pays personal income tax on all net business income in the year it is earned, at their combined federal and Ontario marginal rates. There is no separate business tax return — it all flows through your personal T1.

An Ontario corporation pays corporate income tax, which for Canadian-controlled private corporations (CCPCs) on active business income up to the federal small business limit is significantly lower than most personal marginal rates. That tax deferral — leaving money in the corporation at the lower rate rather than drawing it personally — is often the primary tax reason to incorporate.

However, when you eventually take that money out of the corporation as salary or dividends, you pay personal tax at that point. Incorporation also carries administrative costs: accounting fees, corporate tax returns, annual filings, and legal maintenance. The right answer depends on your income level, whether you need all the money personally each year, and other factors like liability protection. A tax lawyer or accountant can model both scenarios for your situation.