I've heard this old chestnut from various people over the years but have never been able to find any solid information on the process and thus, never put it to the test.

The claim is that if you plan to save/invest a significant portion of your income (which I do), you can incorporate, pay yourself whatever income you actually need for spending, and keep the rest in the corporation (or invested).

Let's assume that we're talking about an amount of money beyond the allowable limit for the Tax Free Savings Account.

My question is, can this actually be done, and if so, how complicated is it and how much money would it actually save? (Or, alternatively, if it's not a viable strategy, what is wrong with it?)

If a concrete answer would require concrete numbers to work with, let's say hypothetically (and this is not my real income/spending) that we're talking about an $80k income with $30k of personal expenses, so $50k (more than half) would be kept in the corporation.

What, if anything, would be the benefit of incorporating and funneling all personal income through the corporation?

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    Note: I feel that this is on topic as I'm not actually talking about running a business; the corporation is just a shell, so it is still "personal" finance. But if others disagree and would prefer to close, I'll respect that decision.
    – Aaronaught
    Commented Aug 26, 2010 at 23:26
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    That was my first thought when I saw the question pop-up in the chat room. That said, it is asked from the perspective of personal finance so it seems fine to me. Since I cannot provide much detail, I'll say this much here about your question: There are indeed some tax advantages to incorporating yourself. There are also some headaches and the taxman will expect some sort of legitimacy to the business itself. (I cannot speak to any particulars regarding Canada, but this is certainly the case in the US.) Commented Aug 27, 2010 at 0:34
  • @Chris: Is it necessary to put "Canada" in the title when the question is tagged that way? (I'm just asking for reference on any future questions I might have.)
    – Aaronaught
    Commented Aug 27, 2010 at 15:28
  • Tags don't help the search engines index a question with keywords as well as a title does, so sometimes it is worth it, especially when there are no other Canadian-specific terms in the title, as is the case here. (Many Canadians would add "Canada" to their search queries to disambiguate a search that would otherwise return too many U.S.-centric results.) Commented Aug 27, 2010 at 15:55
  • What happens if we are talking about high income salaries? 400k-500k?
    – canada_101
    Commented Apr 25, 2021 at 3:11

3 Answers 3


(Disclaimer: I am not an accountant nor a tax pro, etc., etc.)

Yes, a Canadian corporation can function as a partial income tax shelter. This is possible since a corporation can retain earnings (profits) indefinitely, and corporate income tax rates are generally less than personal income tax rates. Details:

If you own and run your business through a corporation, you can choose to take income from your corporation in one of two ways: as salary, or as dividends.

  • Salary constitutes an expense of the corporation, i.e. it gets deducted from revenue in calculating corporate taxable income. No corporate income tax is due on money paid out as salary. However, personal income taxes and other deductions (e.g. CPP) would apply to salary at regular rates, the same as for a regular employee.

  • Dividends are paid by the corporation to shareholders out of after-tax profits. i.e. the corporation first pays income tax on taxable income for the fiscal year, and resulting net income could be used to pay dividends (or not).

    At the personal level, dividends are taxed less than salary to account for tax the corporation paid. The net effect of corporate + personal tax is about the same as for salary (leaving out deductions like CPP.)

    The key point: Dividends don't have to be paid out in the year the money was earned. The corporation can carry profits forward (retained earnings) as long as it wants and choose to issue dividends (or not) in later years.

Given that, here's how would the partial income tax shelter works:

  1. Earn revenue for your corporation, doing whatever real business it does.* (see far below)
  2. Do not pay out all corporate revenue as salary. Leave all or most in the company.
  3. Revenue remaining in the company at the end of the year is subject to corporate income tax, likely at the corporate small business rate. e.g. Ontario, 2010: 15.5%. This rate is significantly less than the top personal income tax rate.
  4. Do not pay out those retained earnings as dividends. Leave all or most in the company.
  5. The company would invest retained earnings to generate a return.
  6. Next year, the company will owe tax on income generated by the invested retained earnings. (Note: The tax man will want to see most of the company's income being active business income – perhaps not a problem if it continues doing real business as in step 1.)
  7. Repeat.

At some point, for you to personally realize income from the corporation, you can have the corporation declare a dividend. You'll then have to pay personal income taxes on the income, at the dividend rates. But for as long as the money was invested inside the corporation, it was subject only to lesser corporate tax rates, not higher personal income tax rates. Hence the "partial" aspect of this kind of tax shelter.

Or, if you're lucky enough to find a buyer for your corporation, you could qualify for the Lifetime Capital Gains Exemption on proceeds up to $750,000 when you sell a qualified small business corporation. This is the best exit strategy; unfortunately, not an easy one where the business has no valuable assets (e.g. a client base, or intellectual property.)

* The major sticking-point: You need to have real business revenue! A regular employee (of another company) can't funnel his personally-earned employment income into a corporation just to take advantage of this mechanism. Sorry. :-/

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    Or, the shortest version of the answer: TANSTAAFL: there ain't no such thing as a free lunch. Commented Aug 27, 2010 at 15:18
  • When you say real business revenue - what if you essentially work for one company but as a contractor, and payments are made to the corporation itself? That would count as business revenue, right? (Also investment income - some corporations do nothing but invest so that must be recognized for something, I would assume.)
    – Aaronaught
    Commented Aug 27, 2010 at 15:26
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    @Aaronaught: Yes, working as a contractor could generate business revenue for the corporation. However, when you say " for one company " one may run afoul of other tax rules. A true independent contractor should have multiple clients. Commented Aug 27, 2010 at 15:58
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    Yes, arbitrary, I completely agree! But thems are the rules :-/ I had one client that could, if I allowed it, occupy 100% of my time, but I make a point of taking on additional projects w/ other clients and trying to develop other lines of business. However, there are sometimes stretches where there is only one client. That's reasonable. Commented Aug 27, 2010 at 16:15
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    Very interesting. This system seems like it would not work in the United States due to the higher corporate income tax.
    – Jim
    Commented Aug 27, 2010 at 17:38

This scheme doesn't work, because the combination of corporation tax, even the lower CCPC tax, plus the personal income tax doesn't give you a tax advantage, not on any realistic income I've ever worked it out on anyway. Prior to the 2014 tax year on lower incomes you could scrape a bit of an advantage but the 2013 budget changed the calculation for the tax credit on non-eligible dividends so there shouldn't be an advantage anymore.

Moreover if you were to do it this way, by paying corporation tax instead of CPP you aren't eligible for CPP.

If you sit with a calculator for long enough you may figure out a way of saving $200 or something small but it's a lot of paperwork for little if any benefit and you wouldn't get CPP.

I understand the money multiplier effect described above, but the tax system is designed in a way that it makes more sense to take it as salary and put it in a tax deferred saving account, i.e. an RRSP - so there's no limit on the multiplier effect.

Like I said, sit with a calculator - if you're earning a really large amount and are still under the small business limit it may make more sense to use a CCPC, but that is the case regardless of using it as a tax shelter because if you're earning a lot you're probably running a business of some size.

The main benefit I think is that if you use a CCPC you can carry forward your losses, but you have to be aware of the definition of an "allowable business investment loss".

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    I think this answer would be more helpful if it presented some actual numbers or calculations - even if they involve a lot of estimates or assumptions - as opposed to telling others to do the math (without any pointers as to what math or how) and apparently wild-guessing an outcome like $200. I appreciate the answer and you sound like you know what you're talking about, don't get me wrong, but it's a little thin on details, and ignores some pretty obvious challenges (i.e. if you're already maxing out your RRSP and TFSA).
    – Aaronaught
    Commented Jul 19, 2013 at 4:38

Revenue Canada allows for some amount of tax deferral via several methods. The point is that none of them allow you to avoid tax, but by deferring from years when you have high income to years when you have lower income allows you to realize less total tax paid due to the marginal rate for personal income tax.

The corporate dividend approach (as explained in another answer) is one way. TFSAs are another way, but as you point out, they have limits.

Since you brought TFSAs into your question:

About the best and easiest tax deferral option available in Canada is the RRSP. If you don't have a company pension, you can contribute something like 18% of your income. If you have a pension plan, you may still be able to contribute to an RRSP as well, but the maximum contribution amount will be lower. The contribution lowers your taxable income which can save you tax. Interest earned on the equity in your RRSP isn't taxed. Tax is only paid on money drawn from the plan because it is deemed income in that year. They are intended for retirement, but you're allowed to withdraw at any time, so if you have little or no income in a year, you can draw money from your RRSP. Tax is withheld, which you may or may not get back depending on your taxable income for that year. You can think of it as a way to level your income and lower your legitimate tax burden

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