IT Contractor Day Rate Through a Corporation Calculator
Leaving a salaried role to contract through your own company changes what a dollar of revenue is worth. Work out what your rate actually leaves you after corporate tax and the salary and dividend mix, and the rate you would need to match the job you are leaving.
take-home after everything
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From Day Rate to Take-Home
| Line | Basis | Amount |
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Salary or Dividend Out of the Corporation
| Item | All Salary | All Dividend |
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Against the Job You Are Leaving
| Item | Basis | Amount |
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Personal Services Business Risk
| Factor | What Points Away From Employment | Your Position |
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Points That Decide This
What to Do Next
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Disclaimer: A corporation carrying on an active business in Canada may be eligible for the small business deduction on income up to the business limit, producing a combined federal and Ontario rate materially below the general rate. A personal services business, defined in subsection 125(7) of the Income Tax Act, broadly arises where an incorporated employee provides services that, but for the existence of the corporation, would reasonably be regarded as an employment relationship with the payer, and where the corporation does not employ more than five full-time employees throughout the year or provide services to an associated corporation. Income from a personal services business is not eligible for the small business deduction, is subject to an additional tax under section 123.5, and the deductions available to the corporation are restricted by paragraph 18(1)(p) broadly to salary and benefits paid to the incorporated employee and certain related amounts, so ordinary business expenses are denied. Whether a relationship would be regarded as employment is a question of fact assessed on factors including control, ownership of tools, chance of profit and risk of loss, integration and the ability to subcontract, and the risk indicator on this page is an informal summary of a few of those factors rather than a determination. The effective personal tax rates, the corporate rates and the personal services business rate used here are editable inputs that should be replaced with figures appropriate to your own circumstances and confirmed against current published rates. The salary and dividend figures shown are simplified illustrations that do not model Canada Pension Plan contributions in detail, RRSP room, the timing of remittances, or the many other factors relevant to an owner-manager compensation decision. This page is general information, not tax advice.
A Day Rate Is Not a Salary Divided by Days
The first mistake people make converting from employment to contracting is comparing gross to gross. A hundred and thirty thousand dollar salary divided by 220 working days is about six hundred a day, so a seven hundred dollar rate looks like a raise.
It is not, because the salary came with things the rate does not. Paid holidays, statutory holidays, sick days, employer pension contributions, health and dental cover, disability insurance, and the employer’s share of payroll taxes were all real money that no longer arrives.
And the unbilled days are yours now. Nobody pays you for the three weeks between contracts, the week you are ill, or the statutory holidays. The number of billable days you can genuinely sustain is the single biggest variable in this calculation, and optimism about it is what makes contracting look better than it turns out to be.
What the Corporation Actually Does for You
Incorporating does not reduce the tax on money you spend. It defers tax on money you do not.
Revenue less expenses is taxed in the corporation at the small business rate, which is far below personal rates. But when you take that money out as salary or dividends, personal tax applies on top. The combined result is broadly similar to having earned it personally. The advantage is timing and control: profit left in the corporation is taxed once at the low rate until you need it.
So the benefit scales with what you can leave behind. A contractor who needs every dollar to live on gets very little from incorporating beyond limited liability and the ability to deduct genuine expenses. One who can leave forty thousand a year in the company gets a real deferral on that forty thousand.
Salary, Dividends, or Both
Money comes out of the corporation as salary, dividends, or a mix. Salary is deductible to the corporation, creates RRSP room and builds CPP entitlement, but costs payroll contributions on both sides. Dividends carry no payroll cost, but they are paid from income the corporation has already been taxed on and create no RRSP room.
For most contractors the answer is a mix rather than either extreme, and it changes with how much you need to draw. This calculator shows both ends so you can see the shape of the trade-off.
The Risk That Undoes All of It
The personal services business rules exist for exactly this situation: someone who would be an employee, interposing a corporation. Where they apply, the small business rate is lost, an additional tax applies, and, most damagingly, ordinary business expenses are denied.
That last part is what makes a designation so expensive. It is not simply a higher rate on profit. It is a higher rate on revenue less almost nothing, because the corporation can generally deduct little beyond salary paid to you.
| Factor | Points Toward Employment | Points Toward Business |
|---|---|---|
| Control | Client sets hours and method | You decide how and when |
| Tools | Client’s laptop and systems | Your own equipment |
| Substitution | They want you personally | You could send someone else |
| Clients | One, continuously | Several at once |
| Risk | Paid for time regardless | Fixed price, you carry overruns |
A single long-term client sitting at their desk using their laptop is the fact pattern. Plenty of IT contractors work exactly that way. The contract wording matters far less than what actually happens day to day, and a clause saying you are an independent contractor does not decide the question.
What Would Actually Help
- A second client, even a small one, which changes the picture more than anything else
- Your own equipment, used for the work rather than sitting at home
- A real right of substitution in the contract and in practice
- Deliverable-based engagements rather than being paid for attendance
- Your own business presence: insurance, a website, other prospects
- Not being absorbed into the client’s structure, with their email and job title
What This Calculator Does Not Cover
- CPP contributions in detail, which reduce the salary route’s advantage
- RRSP room created by salary and not by dividends
- HST registration and the quick method, which is a separate question
- The optimal mix rather than the two extremes shown here
- Income splitting, which the split income rules restrict heavily
- Whether the relationship is genuinely employment, which is fact-specific
The rate question and the PSB question are both worth settling before you sign. Our service for IT consultants covers the rate comparison, the compensation mix and the contract review, and the personal services business calculator models the designation cost in more detail than the risk indicator here.
Frequently Asked Questions
Common questions on contracting through a corporation.
Related Calculators and Guides
More tools for incorporated consultants.
Check the Rate and the Contract Before You Sign
Send us the day rate, the engagement terms and what you earn now. We will work out what the rate genuinely leaves you, what mix of salary and dividends suits how much you need to draw, and whether the engagement as written and as worked carries personal services business risk.