What is Incorporation?

Incorporation is the legal process of forming a corporation as a separate legal entity from its owners. In Canada, businesses can incorporate federally (under the Canada Business Corporations Act) or provincially (under each province's business corporations act).

Why incorporate

• Limited liability — shareholders are generally not personally responsible for corporate debts
• Tax planning — access to small business deduction (~9–13% on first $500K), dividend strategies, RRSP optimization
• Continuity — the corporation persists independent of any individual owner
• Credibility — easier to raise capital, sign large contracts, hire executives
• Eligibility — required for SR&ED CCPC rate (35% refundable), Lifetime Capital Gains Exemption, most government grants

When NOT to incorporate

Incorporation has costs (annual filings, accountant fees, separate tax return). For solo operators earning under ~$80K who don't need liability protection, sole proprietorship is often simpler.

Federal vs. provincial

• Federal — recognized name protection across Canada, slightly higher annual filing burden
• Provincial — only valid in the province of incorporation; cheaper to maintain

Most Canadian SMBs incorporate provincially in the province where they primarily operate. Federal incorporation makes sense for businesses with multi-province operations or strong brand-name protection needs.

Related terms