How to Pay Less Tax as an Incorporated Consultant in Ontario

If you are an incorporated consultant in Ontario, you are in one of the best positions available when it comes to tax planning. Corporations provide tax tools unavailable to employees and unincorporated freelancers, though many consultants fail to utilize them effectively.

Use the Small Business Deduction

Canadian Controlled Private Corporations (CCPCs) benefit from preferential tax treatment on the first $500,000 of active business income, taxed at approximately 12.2% combined federal-provincial rates versus over 53% at the top personal marginal rate. This advantage makes incorporation worthwhile for consultants earning over $100,000 in net profit.

Deductible Expenses Most Consultants Miss

Beyond standard expenses, consultants often overlook home office costs, business portions of internet and phone, professional development, software subscriptions, vehicle expenses (with mileage logs), professional liability insurance, health spending accounts, and life insurance in certain structures.

Optimize Your Salary and Dividend Mix

The salary-to-dividend split represents a major planning decision, dependent on personal income, RRSP objectives, CPP considerations, and retention goals. A simple rule of thumb: pay yourself enough salary to generate the RRSP contribution room you want, then top up with dividends.

Income Splitting Through a Spousal Shareholder

Dividends distributed to a spouse or adult family member shareholder can reduce overall family tax burden, though Tax on Split Income (TOSI) rules require proper structuring.

Retain Earnings and Invest Inside the Corporation

Consultants can retain corporate income at 12.2% tax and reinvest it, allowing after-tax dollars to compound. However, once passive investment income inside the corporation exceeds $50,000 per year, the small business deduction starts to phase out.

The PSB Risk

The Canada Revenue Agency classifies certain consulting arrangements as Personal Services Businesses (PSBs). If the majority of your revenue comes from one client and you work exclusively for them, talk to your accountant about PSB risk.