Lawyer and Paralegal Incorporation Tax Calculator
A professional corporation does not reduce the tax on money you spend. It defers tax on money you leave in. Work out the annual deferral, the disbursement HST treatment, the WIP inclusion and whether incorporating is worth it for your practice.
annual deferral
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Unincorporated Against a Professional Corporation
| Item | Unincorporated | Professional Corporation |
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HST on Fees Against Disbursements
| Item | Treatment | HST |
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Work-in-Progress on Incorporation
| Item | Basis | Amount |
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LSO Professional Corporation Checklist
| Requirement | Detail |
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Points That Decide This
What to Do Next
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Disclaimer: Corporate tax is applied at the Ontario combined rate of 12.2% on active business income within the $500,000 small business limit. Personal tax is applied at Ontario combined marginal rates, and dividends are treated as non-eligible dividends paid from income taxed at the small business rate. Self-employed CPP is applied at 11.90% on pensionable earnings between the $3,500 basic exemption and the $74,600 YMPE for 2026, to a maximum of $8,460.90, plus CPP2 at 8.00% on earnings between the YMPE and the $85,000 YAMPE to a maximum of $832. A salaried employee and their corporation each contribute 5.95% to a maximum of $4,230.45, plus CPP2 at 4.00% to a maximum of $416 each. Legal and paralegal services are taxable supplies subject to HST at 13% in Ontario. Disbursements incurred as agent for a client and passed through at cost, such as court filing fees and registration fees paid on the client’s behalf, are generally treated as reimbursements outside the consideration for the supply. Disbursements incurred as principal and rebilled form part of the consideration for the legal service and are subject to HST. The billed-basis election formerly available to designated professionals was repealed and phased out, so work in progress must be included in income. A transfer of a practice to a corporation is generally structured under section 85 so that WIP and other assets move at elected amounts. Under the Law Society Act and the Law Society of Ontario By-Laws, a professional corporation must hold a valid certificate of authorization, all issued and outstanding shares must be legally and beneficially owned directly or indirectly by licensees of the same class, all officers and directors must be licensees, the corporation may not carry on a business other than the practice of law or the provision of legal services, and professional liability is not limited by incorporation. This page is general information, not tax or legal advice.
Incorporation Defers Tax, It Does Not Reduce It
This is the sentence every sole practitioner should hear before spending money on a professional corporation. If you draw every dollar the practice earns, incorporating saves you almost nothing, because the money is taxed in your hands either way and the corporation is a stop on the journey rather than a destination.
The benefit exists only on the money you leave inside. Income retained in the corporation is taxed at twelve point two percent instead of your personal marginal rate, and the difference stays invested until you take it out.
| Net Practice Income | Personal Cash Needed | Retained | Deferral Worth |
|---|---|---|---|
| $180,000 | $170,000 | Almost nothing | Not worth incorporating on tax alone |
| $250,000 | $150,000 | Meaningful | Worth a proper calculation |
| $400,000 | $150,000 | Substantial | Clearly worth it |
The rough test is whether you can leave sixty thousand dollars or more in the corporation each year. Below that, the annual accounting, the LSO certificate and the extra filings eat most of the benefit, and the honest advice is often to stay unincorporated a while longer.
Disbursements Are the Part Firms Get Wrong
The HST treatment of a disbursement depends entirely on whether you incurred it as agent for the client or as principal in the course of your own supply. Same invoice line, completely different answer.
| Disbursement | Capacity | HST on Rebilling |
|---|---|---|
| Court filing fee paid on the client’s behalf | Agent | Outside the consideration |
| Land registration fee | Agent | Outside the consideration |
| Courier, printing, your own travel | Principal | Part of the fee, taxable |
| Expert report you engaged in your own name | Principal | Part of the fee, taxable |
The practical consequence is that agency has to be real. Where the client is legally liable for the amount and you merely paid it for them, the pass-through works. Where you contracted in your own name and rebilled, it is part of your fee and HST applies whether or not you charged it.
A firm that treats every disbursement as a non-taxable pass-through is accumulating an HST liability. On an audit the CRA looks at who was legally liable for the underlying charge, not at how the line was described on the account. Getting the retainer wording right is what makes agency defensible.
Work in Progress Is Income Now
The billed-basis election that let designated professionals exclude work in progress from income was repealed and phased out. WIP has to be included, which means unbilled time is taxed before it is collected.
On incorporation this matters twice. The practice being transferred has WIP in it, and that transfer needs to be structured under section 85 so the amounts move at elected values rather than triggering a cash tax bill on a receivable nobody has yet paid.
A practice with sixty thousand dollars of unbilled time has sixty thousand dollars of income sitting in the file. That is real tax on money not yet received, and the cleanest answer is usually to bill down the WIP before a year end rather than to carry it.
Salary or Dividends
Once incorporated, the mix is a genuine decision rather than a formality, and it is not only about the arithmetic.
- Salary creates RRSP room at eighteen percent of earned income, and dividends create none
- Salary builds CPP, which is a cost to some and a benefit to others
- Salary is deductible to the corporation, dividends are not
- Dividends avoid payroll remittances and the administration that comes with them
- Lenders prefer salary, which matters if a mortgage is coming
- Salary to a spouse must be reasonable for work actually performed
A common middle path is salary to roughly the CPP maximum, which secures RRSP room and a full CPP year, with the balance as dividends. That is a default rather than an answer, and it should be revisited when income changes.
The LSO Rules Are Strict and Non-Negotiable
A law or paralegal professional corporation is not an ordinary company. The Law Society Act and the By-Laws impose conditions that cannot be planned around.
- A certificate of authorization from the Law Society, renewed annually
- All shares held by licensees of the same class, directly or indirectly
- All officers and directors must be licensees
- The corporation may not carry on any other business beyond the practice
- The name must comply and include the required designation
- Professional liability is not limited by incorporating
The share ownership restriction is what blocks the income splitting other professionals rely on. A medicine professional corporation can issue non-voting shares to family members. A law professional corporation cannot, because all shares must be held by licensees of the same class. That single rule removes a large part of the planning available elsewhere.
The Trust Account Runs Alongside All of This
Trust accounting under By-Law 9 is a separate obligation from the corporate books and it is where LSO spot audits concentrate. Trust funds are not practice income and must never touch the general account.
- Separate trust and general accounts, with no commingling ever
- Monthly trust reconciliations completed within the required period
- Client trust ledgers maintained individually
- The trust comparison performed and documented
- Transfers to general only against a delivered account
- Records retained for the required period
What This Calculator Does Not Cover
- The setup cost of the corporation and the certificate of authorization
- Trust account compliance, which is a By-Law 9 matter rather than a tax one
- Partnership and multi-licensee structures, which change the analysis
- The lifetime capital gains exemption on an eventual practice sale
- Provinces other than Ontario and other regulators
- Passive investment income and the small business limit grind once funds accumulate
The question is not whether to incorporate, it is whether you can leave money in. Our service for lawyers and law firms covers the incorporation, the disbursement treatment, the trust reconciliations and the year end.
Frequently Asked Questions
Common questions on incorporating a legal practice in Ontario.
Related Calculators and Guides
More tools for legal practices.
We Will Tell You If It Is Not Worth Incorporating
Send us last year’s practice figures and what you need to live on. We will model the deferral, fix the disbursement treatment, handle the certificate of authorization and set up the trust reconciliations.