What are the main tax differences between a sole prop and a corporation in Ontario?

As a sole proprietor, all net business income is added to your other income and taxed at your personal marginal rate in the year it is earned — even if you reinvest it in the business. Ontario personal rates on higher incomes can exceed 50% combined federal and provincial.

A Canadian-controlled private corporation (CCPC) that qualifies for the small business deduction pays a significantly lower combined federal and provincial tax rate on the first threshold of active business income. This creates a potential tax deferral: you leave money inside the corporation, pay the lower corporate rate, and only pay personal tax when you extract funds as salary or dividends. The deferral can accelerate capital accumulation inside the company.

However, the benefit depends on your total income, how much you need to draw personally, and how you structure compensation. Paying yourself a salary generates RRSP room; dividends do not. Reasonable salaries to family members who work in the business can shift income to lower-bracket family members, though the tax on split income (TOSI) rules limit this in certain situations. Always work with an accountant alongside your lawyer to model the numbers for your situation.