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Incorporating your business means you're no longer a contractor — you’re now running a business in the eyes of the CRA, which means that you need to adapt a new tax structure, new forms, and a whole new set of responsibilities as a business owner. And if you're not careful, it’s easy to leave money on the table or miss deadlines that come with penalties. And we admit, filing taxes as an incorporated contractor isn’t fun. But missing out on deductions? That’s worse.
So, if you're staring at a pile of receipts and wondering where to start, take a breath. This guide breaks down exactly what you need to know about corporate income tax as an incorporated contractor — from what to file and when, to the deductions most people miss (but you won’t).
Let’s turn tax season from a source of stress into a smart business advantage.
If you’ve taken the leap and incorporated your business — congratulations! You’ve created a separate legal entity with new advantages and responsibilities. One of the most important? Filing a T2 corporate income tax return each year with the CRA.
Unlike sole proprietors, who report business income on their personal T1 return, incorporated contractors must file a separate corporate return. Why? Because your corporation exists independently of you, even if you're the only owner and employee.
Filing corporate taxes isn’t just a legal requirement — it’s your gateway to key benefits, such as:
Let’s clarify with an example:
Sole Proprietor: Picture a freelance web designer named Alex. He earns $80,000 from clients, tracks his expenses (like software subscriptions and home office costs), and reports everything on his personal T1 return. Simple, right?
Incorporated Contractor: Now imagine Alex incorporates his business as “Alex Designs Inc.” His company earns the same $80,000, but it’s the corporation’s income, not his personally. He files a T2 return for the business, reporting its revenue and expenses, and then decides how to pay himself (more on that later).
Filing your corporation income tax in Canada doesn’t need to be a mystery. Here’s a detailed roadmap to get you through the process, packed with practical tips and tools:
Before you even think about filling out forms, you need a clear picture of your corporation’s finances. This means tracking:
Tip: Use accounting software like Xero to streamline this. Set aside 15 minutes each week to log transactions — it’s less painful than tackling a year’s worth of receipts in one go. For example, an HVAC contractor might log a $500 tool purchase or a $200 gas bill right after the expense, keeping everything current.
Deductions are your secret weapon to lower taxable income. As an incorporated contractor, you can claim business expenses that sole proprietors might also claim, but the key is ensuring they’re tied to your corporation. Common ones include:
Tool Recommendation: There are apps that scan receipts and tracks business mileage automatically. For instance, a real estate agent driving to showings could log 15,000 km annually, claiming a hefty deduction if properly documented.
The T2 return is the heart of your corporate tax filing. It’s where you report your corporation’s: 1) Revenue (what you earned), 2) Expenses (what you spent), 3) Net income (what’s left after expenses); and 4) Taxes owed (based on your taxable income).
You can file online using CRA-approved software, or hire an accountant to file these for you. If you’re a hands-on type, these softwares walk you through each section, but for complex cases — say, multiple revenue streams or significant investments — an accountant ensures accuracy.
Example: A consultant earning $120,000 with $30,000 in expenses would report a net income of $90,000 on their T2 return, then calculate taxes based on the Canadian small business tax rate (more on rates later).
Timing is everything with corporate taxes. Miss a deadline, and the CRA won’t hesitate to slap on penalties. Here’s what you need to know:
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Stay Ahead: Use the CRA’s My Business Account portal to track deadlines and balances. Set phone reminders a month, a week, and a day before each due date. Or, partner with a pro — at Ennovo Solutions, we’ve seen contractors save hundreds just by avoiding late fees.
Deductions are where incorporated contractors can shine, reducing taxable income and keeping more of your hard-earned cash. Here’s an expanded list with examples to spark ideas:
Check the CRA’s small business tax guide for more ideas, and keep receipts — they’re your audit armor.
When you're the owner of an incorporated business, how you pay yourself isn’t just an administrative detail—it’s a strategic financial decision. The way you withdraw profits from your corporation can affect everything from your personal tax bill to your retirement contributions and even how the Canada Revenue Agency (CRA) views your business.
Understanding the difference between salary and dividends, and the implications of each, is crucial for incorporated contractors, especially those operating as personal service businesses (PSBs). PSBs are often treated differently by the CRA because their income tends to resemble employment income, even though they operate through a corporation. This makes it especially important to structure payments carefully to stay compliant, minimize taxes, and plan for long-term financial health.
Running your own corporation gives you more control and more ways to trip up. Even experienced incorporated contractors can slip into these easy-to-make mistakes. Here are a few things that can help you with how to steer clear from these common tax pitfalls for incorporated contractors like you:
Using your personal card for a business dinner? Paying for software from your personal account? These habits make it harder to claim valid expenses — and raise red flags in an audit.
Fix: Open a separate business bank account and credit card under your corporation’s name. For past spending, go back and tag business-related transactions using your statements — keep solid records in case the CRA comes knocking.
Your corporation’s tax returns, T4s, GST/HST filings — each one has its own deadline. Miss even one and interest and penalties start adding up fast.
Fix: Create a master calendar of all corporate filing dates. Missed a deadline? File now and request CRA penalty relief if you’ve got a solid reason (like a health issue or family emergency).
When you pay yourself a salary, your corporation needs to withhold income tax, CPP, and possibly EI — just like a regular employer would. Skip this, and you could owe big.
Fix: Use payroll software or work with a bookkeeper to ensure you’re remitting the right amounts on time. CRA penalties for missed remittances are steep and unforgiving.
Just because your corporation earned $100K doesn’t mean it’s all yours. Forget to set money aside, and year-end can hit hard.
Fix: Estimate your corporate tax rate and transfer a portion of revenue to a tax holding account each month. Bonus: put it in a high-interest business savings account to earn while you wait.
If you paid yourself via salary (T4) or dividends (T5), those slips are due by February 28. Miss them, and you could delay your personal tax return or trigger CRA attention.
Fix: Even if it’s late, file the slips — penalties increase the longer you wait, but CRA generally prefers late over never.
Taxed more than what you were supposed to tax for? It happens — even to the most organized contractors. The key is to act fast and get back on track. Here’s how to recover from the most common missteps:
Filing corporate taxes as an incorporated contractor in Canada can feel like a solo climb, but with the right tools — a solid T2 return process, timely deadlines, smart deductions, and a salary strategy, you’re set for success.
Ready to take control of your taxes? Book a discovery call with Ennovo Solutions and let’s craft your tax success story together.
Walk away with actionable insights you can implement into your business today
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