Side Hustle Making $50k? Why 'Incorporating' Might Save You Thousands in Taxes
 |
| Side Hustle Making $50k? |
You started driving for Uber, consulting, or selling on Etsy as a side gig. At first, the extra $5,000 or $10,000 was just nice pocket money. You reported it as "Sole Proprietorship" income on your T1 personal tax return.
But now, your side hustle is booming. You are netting $50,000 or more in profit. Suddenly, the CRA is taking a massive chunk of your earnings because it is added on top of your day-job salary.
Is it time to level up? Here is why switching from a "Sole Proprietor" to a "Corporation" (Inc.) could be the best tax move you ever make—if you do it right.
The Tax Gap: 53% vs. 12%
In Canada, personal tax rates are progressive. If you have a full-time job and a profitable side hustle, your combined income might push you into the highest tax bracket.
- Personal Tax (Top Bracket): You could pay up to 53.53% (in Ontario) on every extra dollar you earn.
- Corporate Tax (Small Business Rate): Canadian-Controlled Private Corporations (CCPCs) pay a much lower rate on the first $500,000 of active business income. In Ontario, this is just 12.2%.
That is a massive difference in immediate cash flow.
The Magic of "Tax Deferral"
Incorporating allows you to control when you pay personal tax. The corporation acts as a "money tank."
💰 The Strategy
Let's say your side business profits $50,000.
Scenario A (Sole Prop): You profit $50k. You are taxed personally immediately at your marginal rate. You might lose ~$26,000 to taxes. Leftover: $24,000.
Scenario B (Corporation): The Corp earns $50k. It pays ~12.2% corporate tax ($6,100). Leftover: $43,900.
The Trick: You leave that ~$44k INSIDE the corporation to buy new equipment, run ads, or expand. You have almost double the capital to reinvest compared to the Sole Prop scenario.
⚠️ The "PSB" Danger Zone (Crucial Warning)
Before you run to incorporate, you must check if you are a "Personal Services Business" (PSB).
If you are a consultant with only ONE client (e.g., an IT contractor working full-time for a bank), the CRA may view you as an "Incorporated Employee."
- The Penalty: You lose the 12% rate. Your tax rate jumps to approx. 44.5% - 50%.
- The Fix: You generally need multiple clients and control over your work to qualify for the small business rate.
When Should You Incorporate?
Incorporating isn't free. Setup costs $1,000+, and annual accounting fees (Corporate T2 Return) are typically $2,500+.
You should generally incorporate ONLY when:
- You earn more than you spend: If you need every dollar to pay rent, incorporation is useless (because you trigger personal tax when you withdraw the money).
- You have liability risks: A corporation provides a legal shield. If your delivery driver crashes, they sue the company, not you personally.
- Your net profit exceeds $50k - $80k consistently.
Chief Editor’s Verdict
Incorporating is a serious commitment with more paperwork and strict rules about passive investment income (new 2/3 capital gains inclusion rules apply).
However, if your side hustle has turned into a serious cash cow and you can afford to leave money in the company, talk to a CPA today. Turning your "gig" into a "legal entity" is the secret to building long-term wealth in Canada.
0 Comments