In today's Canadian Taxes A to Z (2015), we finally get to the letter "S". Arguably the most useful of Scrabble letters, and not too shabby from a tax perspective either. S is for Small Business Deduction.
The Small Business Deduction reduces taxes for Canadian Controlled Private Corporations (CCPCs). It unfortunately does nothing for you if you're operating as a sole proprietor or partnership. The reduction is available on the first $500,000 of income. For 2015, it results in a tax reduction of 17% off the base corporate tax rate. This amount is going up by 1/2 a percent every year until 2019, when it will result in a 19% reduction.
This Small Business Deduction is in addition to the already generous 10% Federal Tax Abatement knocked off the base 38% corporate tax rate. What this means is an incredibly low 11% tax rate for 2015, falling to an even more incredibly low 9% by 2015. This rate can make United States taxes look high by comparison.
So what's the catch? First, the corporation must be private (meaning not publicly trading shares) and controlled by Canadian residents. Neither of these are very onerous requirements for incorporated small businesses.
The bigger catch is that you'll get taxed again as an individual when you withdraw income from the corporation, such as being paid as an employee. There are various ways to structure the means through which you pay yourself from the corporation to minimize the taxes paid, but there is always a risk of double taxation: once in the hands of the corporation, and then again when the money passes into your own hands.
The most important factor to keep in mind in considering whether incorporating your business is going to do much for you from a tax perspective is whether you'll be in a position to shelter net income in the corporation, or will need to withdraw all the profits each year for your own living expenses. If you're able to shelter income, then you'll be able to invest those excess profits after losing only between 9% and 11% of them to tax. So it's kind of like an RRSP, but one where you lose a small amount off the top. Unlike an RRSP, you aren't claiming a deduction for the income you shelter in the corporation, but the effect is the same because you won't personally pay any tax on that income until you take it out of the corporation and place it in your own hands.
While there can be other legal benefits to incorporation, like limiting your personal liability, you should get accounting advice on whether incorporation is really going to save you any money at tax time. It's possible that it might actually cost you money (after increased legal and accounting fees are taken into account) if you aren't able to shelter any income inside the corporation.