Incorporating a Law Practice in Canada

Unlock the Small Business Deduction and corporate investing.

Incorporating a law practice through a professional corporation is one of the highest-impact tax decisions a Canadian lawyer can make. Active business income up to $500,000 qualifies for the Small Business Deduction, dropping the combined federal-provincial corporate rate to roughly 12.2% in Ontario - compared to a personal top rate above 53%.

The benefit is deferral. Income earned but not needed personally stays inside the corporation, taxed at low rates, and reinvested. Over time, the gap between the corporate rate and the personal rate compounds - especially when paired with corporate investing, an Individual Pension Plan, and life insurance owned by the corporation.

SG Wealth Management helps Canadian lawyers evaluate, structure, and optimize incorporation. Coordinate with tax planning for lawyers.

Core Benefits

What Incorporation Unlocks

Small Business Deduction

First $500,000 of active business income taxed at roughly 12.2% combined corporate rate in Ontario - a major deferral against personal rates.

Corporate Investing

Retained earnings can be invested inside the corporation, accumulating wealth at low corporate tax rates.

Income Splitting

Limited but real opportunities to pay reasonable salary to family members for legitimate work, subject to TOSI rules.

Estate Tools

Estate freeze, multiple wills, the Capital Dividend Account, and the lifetime capital gains exemption become available.

When Incorporation Makes Sense

Incorporation is most valuable when you earn more than you spend. As a rule of thumb, lawyers with personal spending below their net professional income by at least $50,000 to $75,000 per year capture meaningful deferral by leaving surplus inside the corporation.

If all professional income is needed personally, the deferral disappears - dividends or salary are paid out, and the corporation simply adds administrative cost. Cash flow modelling is the first step in any incorporation decision.

Coordinate with financial planning for lawyers.

Salary vs Dividends

Salary (T4 Income)

Generates RRSP contribution room (18% of earned income)
Counts toward CPP - both contributions and future benefits
Required to fund an Individual Pension Plan
Deductible to the corporation, taxable to the lawyer at personal rates

Dividends

No RRSP room or CPP - simpler administration
Taxed at the dividend tax credit rate, generally lower than salary
Eligible vs non-eligible dividends affect the tax calculation
Paid from after-tax corporate income, no deduction to the corporation

The Passive Income Threshold

For every dollar of passive investment income above $50,000 inside the corporation, the Small Business Deduction is reduced by $5. At $150,000 of passive income, the SBD is fully eliminated and active business income is taxed at the general corporate rate of roughly 26.5%.

Managing the threshold is increasingly important as corporate retained earnings grow. Corporate-class funds, permanent insurance, holding company structures, and Individual Pension Plans all help reduce reportable passive income.

See investment planning for lawyers.

Holding Companies and Asset Protection

A holding company sits between the lawyer and the operating professional corporation. Surplus cash and investments are moved up tax-free as inter-corporate dividends, isolating accumulated wealth from operating-business liability.

For lawyers facing professional liability exposure, this structural separation is one of the most powerful protections available. Combined with segregated funds and corporate-owned life insurance, the holding company becomes the centre of long-term family wealth - growing surplus tax-deferred and ultimately distributing through the Capital Dividend Account tax-free.

See estate planning for lawyers.

Why Work with SG Wealth Management

SG Wealth Management helps Canadian lawyers evaluate, structure, and optimize their professional corporations - coordinating with your accountant on the salary-versus-dividend mix, passive income management, and corporate investing strategy.

We integrate the corporation into the larger plan: insurance, retirement, estate, and creditor protection are designed together rather than bolted on after the fact.

Book a consultation to make sure your professional corporation is doing all the work it can for your wealth.