You’re a contractor up North. You’re a pro at your trade, whether that’s framing a house in Whitehorse or tackling a kitchen gut in Yellowknife. But the business side of things? The paperwork? Sometimes it feels like you’re trying to read blueprints in the dark.
One of the first, and biggest, questions you’ve got to answer is this: Are you going to be a sole proprietor, or is it time to incorporate?
Trust me, this choice matters more than you think. Let’s dig in.
Before You Hammer a Single Nail: Why Your Business Structure is Your Most Important Blueprint
Think about it like this: your business structure is the foundation of your company. If you pour it right, everything you build on top is solid. But if you get it wrong? You could be dealing with some serious cracks down the road.
For contractors, especially with the unique challenges up North, this isn’t just a tax thing. It’s about protecting what you’ve worked for—your home, your family, your future—from the inevitable risks that come with the job. You need to build a business that can handle whatever a northern winter, or a tough project, throws at it.
The Two Main Paths: What’s a Sole Proprietorship vs. an Incorporation?
Let’s break these two options down into plain English.
- Sole Proprietorship: This is the simple route. Basically, you are the business. There’s absolutely no legal line drawn between your personal bank account and your business bank account. The money you make is your income. The debts you rack up are your debts. It’s fast, it’s easy, and it’s straightforward.
- Incorporation: This one’s a little more involved. When you incorporate, you create a completely separate legal entity. It’s like a new “person” in the eyes of the law. The business is its own thing. It owns the tools, it takes on the debt, and it signs the contracts. You’re the owner (a shareholder) and probably an employee of your own company.
So, one is you. The other is its own thing. What does that actually mean when the rubber hits the road?
Are Your Personal Assets on the Line? A Deep Dive into Liability
This is the big one. Really. Picture this: a supplier issue throws a project in Fort St. John way off schedule, and suddenly you can’t cover a massive bill. Or, even worse, there’s an accident on a job site. A client sues you for way more than your insurance policy covers.
If you’re a sole proprietor, that lawsuit isn’t just aimed at your business. It’s aimed squarely at you. They can go after your savings account, your truck, even your family home. There’s no firewall between your work life and your home life. It’s a scary thought that keeps a lot of contractors up at night.
Now, if you’re incorporated, the story changes. Remember how the business is its own legal person? That means the lawsuit or the debt belongs to the corporation. Your personal stuff is generally safe, protected by what lawyers call the “corporate veil.” As long as you’ve run your business by the book, the risk stops with the company’s assets. For many contractors, that peace of mind is worth all the paperwork in the world.
The Big Question: How Will This Affect My Taxes?
After liability, taxes are the next biggest headache. So, how does each option stack up when the CRA comes calling?
The Sole Proprietor Tax Story
It’s pretty simple. Every dollar of profit your business makes flows directly onto your personal T1 tax return. You report it, pay your taxes on it at your personal rate, and you’re done. It’s easy, for sure. But here’s the catch: if you have a really good year, you can easily get bumped into a much higher tax bracket, paying way more in tax than you might have to.
The Corporation Tax Story
This is where things get interesting. A Canadian-controlled private corporation gets a huge tax break on its first $500,000 of profit, thanks to the Small Business Deduction. The corporate tax rate is much, much lower than personal rates.
You pay yourself out of the company with either a salary (which the company writes off as an expense) or through dividends. This separation is a game-changer. It gives you incredible flexibility. You can decide to leave profit in the corporation, letting it grow at that low tax rate so you can buy a new truck or gear up for a bigger job next year. It’s a powerful financial strategy that a sole proprietor just doesn’t have access to.
Getting Started: What’s the Real Cost in Time and Money?
Okay, so a corporation sounds pretty great for limiting risk and saving on taxes. What’s the catch? Well, it mostly boils down to cost and complexity.
- Sole Proprietorship: You can be up and running for almost nothing. Often, you just need to register your trade name with your territorial registry (like Yukon Corporate Affairs or NWT Corporate Registries). The ongoing paperwork is minimal—it’s just rolled into your personal tax filing.
- Incorporation: This path has more upfront costs. You’ve got government filing fees, and you’ll almost certainly want a lawyer or an accountant to make sure it’s all set up correctly. Every year, there’s more to do. You have to file a separate T2 corporate tax return and keep records like a corporate minute book. It’s definitely more work.
Planning to Grow? Which Structure Builds a Bigger Future?
If your grand plan is to be a one-person show forever, a sole proprietorship might just be all you ever need. But what if you’re dreaming bigger?
A corporation just looks more official. It has more credibility when you’re trying to get a loan from the bank, setting up accounts with major suppliers, or bidding on those big government contracts. It also makes it way easier to bring on a partner (by issuing them shares) or to sell the whole business when you’re ready to hang up your tool belt. A corporation is a real asset you can sell; a sole proprietorship is really just you and your reputation.
Making the Call: A Quick Checklist for Your Contracting Business
Let’s put it all side-by-side to make it simple.
| Feature | Sole Proprietorship | Corporation | |—|—|—| | Liability | Unlimited. Your house and truck are on the line. | Limited. Your personal assets are typically safe. | | Taxes | Simple, but profits are taxed at your high personal rate. | More complex, but offers a low corporate tax rate and planning perks. | | Cost | Super cheap to start and run. | Higher setup costs and annual fees for upkeep. | | Admin | A breeze. It’s just part of your personal taxes. | More work. Requires separate filings and formal records. | | Growth | Perfect for solo operators. Tough to sell or add partners. | Built for growth. Easy to add owners, sell, and build credibility. |
You’ve Decided. What’s the Next Step?
If you’re leaning toward being a sole proprietor, your next move is probably just registering your business name. If a corporation feels right, you’ll need to get your Articles of Incorporation filed.
But hold on. This guide is a starting point, not the final word. Every single contractor’s situation is different. Your income, your attitude toward risk, your family life, your goals for the future—it all matters.
The smartest move you can make is to build your business on a foundation of solid, personalized advice. Getting this right from day one can save you a fortune in taxes and prevent a mountain of stress later. Before you do anything else, you need a plan built just for you. We can’t stress this enough: you should get in touch with an accountant who gets the unique world of contracting in the North.
Frequently Asked Questions
Can I switch from a sole proprietorship to a corporation later? Yep, 100%. Lots of successful businesses start simple and incorporate later when it makes sense. It involves rolling your existing business assets (tools, client lists, etc.) into the new corporation. It’s a bit tricky to do it in a tax-smart way, so you’ll definitely want an accountant to guide you through it.
As a contractor in the Yukon or NWT, do specific territorial programs favour one structure over the other? Not usually. Most government grants and programs are open to both. That said, some of the bigger financing programs might find an incorporated business more attractive because its finances are more formal and separate. It never hurts to check with your local economic development office to see what’s current.
If I incorporate, do I still need liability insurance? YES. Absolutely, positively, yes. Think of them as two different kinds of armour. Incorporation protects your personal assets from the business. Liability insurance protects your business assets from things that go wrong on the job. You need both. No question.
My spouse helps with bookkeeping and client calls. How does that work? Great question! In a sole proprietorship, you can pay your spouse a reasonable salary for their work and write it off as a business expense. A corporation gives you even more options. Your spouse can be an official employee, a director on the board, or even a shareholder. This can open up some really smart family tax-planning strategies.
What extra paperwork does a corporation have that a sole proprietor doesn’t? Here’s the quick and dirty list:
- Annual Corporate Tax Return (T2): It’s a whole separate tax return just for the business, and it’s more complicated than your personal one.
- Annual Filings: You have to file a report each year with the government (federal or territorial) to prove you’re still active.
- The Minute Book: You have to keep a formal binder with all the legal documents, like records of shareholder meetings and director’s decisions. It sounds old-school, but it’s a legal must-have.