If you incorporated to run your consulting, IT contracting, freight, trades, or professional services work, your bookkeeping now does something it did not do when you were a sole proprietor. It supports a T2 corporate return, GST/HST filings, payroll remittances, shareholder-loan tracking, and the personal tax you pay when money leaves the corporation as salary or dividends.
One rule sits underneath all of it: your corporation is a separate legal and tax entity. Revenue belongs to the corporation first. Personal expenses paid from the corporate bank account do not become deductions. Cash you take out is either salary, a dividend, an expense reimbursement, or a shareholder loan—never “just a transfer.”
This guide covers the 2026 CRA rules, rates and thresholds you need to keep accurate books, prepare your T2 return, and avoid the tax traps the CRA is actively enforcing.
Why Bookkeeping Changes So Much Once You Incorporate
Is a Corporation Really Separate from Its Owner?
Yes. The corporation has its own bank account, its own income and expenses, its own assets and liabilities, and its own tax return. You are the shareholder — a separate person for tax purposes. Client payments belong in the corporate account. Corporate bills get paid from the corporate account. Personal spending stays personal.
The single most common mistake incorporated contractors make is treating the corporate bank account like a second personal account and letting the bookkeeping catch up “at year-end.” By then, the receipts are gone, the categorizations are guesses, and the shareholder loan account is a black box.
Can I Use Corporate Money for Personal Expenses?
You can move money out, but not by calling a personal purchase a business expense. Every withdrawal must be classified as one of the following:
- Salary or bonus: Deductible to the corporation, taxable to you, requires a payroll account and CPP/CPP2/income tax withholdings, produces a T4 slip.
- Dividend: Paid from after-tax corporate profit, not a corporate expense, requires a directors’ resolution, produces a T5 slip.
- Reimbursement: Of an expense you personally incurred on the corporation’s behalf, supported by a receipt.
- Shareholder loan advance: Money the corporation is lending you, tracked on the balance sheet, subject to subsection 15(2) of the Income Tax Act.
- Shareholder loan repayment: The corporation paying you back for money you previously put in.
Coding a personal purchase as “office supplies” does not make it a deduction. It creates a taxable benefit or a shareholder-loan balance the CRA will unwind on audit.
Setting Up Your Corporate Books
Do I Need a Separate Corporate Bank Account?
Yes. A dedicated corporate chequing account is required for client deposits, subcontractor payments, software subscriptions, professional fees, insurance, GST/HST payments and refunds, payroll, and corporate tax instalments. Running the corporation through a personal account destroys the legal separation you paid to set up and makes reconciliation painful.
Should I Use a Corporate Credit Card?
Yes, and only for corporate purchases. Attach the receipt the same day. If a personal charge lands on the corporate card by accident, book it to the shareholder loan account. Do not bury it in “miscellaneous” and hope it disappears.
What Chart of Accounts Should a Canadian Corporation Use?
Keep it lean. Category creep makes the T2 harder, not easier. A workable chart of accounts for an incorporated contractor looks like this:
Do not create 40 sub-accounts for coffee, snacks, and taxis.
Recording Revenue and Expenses
Gross Invoice or Bank Deposit?
Record the gross invoice amount as revenue and record processing fees, platform fees, or third-party deductions as separate expenses.
If you bill a client $10,000, Stripe keeps $300, and $9,700 lands in your account, the entries are:
- Revenue: $10,000
- Payment processing fees: $300
- Bank deposit: $9,700
Coding only the $9,700 as revenue understates income by $300 and understates expenses by $300 — the T2 return no longer ties out against the third-party slips the platform files with the CRA. Under-reported revenue is the fastest way to draw a review.
What About Client Reimbursements?
If your contract says the client reimburses your travel or subcontractor costs, the reimbursement is revenue. The related expense is a deduction. Both sides go through the books; nothing gets netted invisibly. If the reimbursement is billed with GST/HST added, you collect and remit it.
Do I Need Accounts Receivable?
If you invoice and get paid later, yes. Track A/R by client so you know what is outstanding, when it was billed, and when it was collected. Under accrual accounting — the default for most incorporated contractors — revenue is recognized when earned (invoiced), not when the money arrives.
Which Expenses Can the Corporation Deduct?
The expense must pass a four-part test: incurred to earn business income, reasonable in amount, properly documented, and recorded in the corporation’s books. (For mixed-use costs like phone or vehicle, it must be allocated between business and personal use). The corporation paying for something from its own bank account does not automatically make it deductible.
What can you actually claim?
The regular deductions for an incorporated contractor:
- Accounting, bookkeeping, tax preparation
- Legal and professional fees related to the business
- Business insurance (E&O, liability, cyber)
- Software and SaaS (accounting software, project tools, design apps)
- Web hosting, domain, email service Advertising and marketing (Google Ads, LinkedIn Ads, sponsorships)
- Office supplies and consumables
- Business-use portion of cellphone and internet
- Coworking, office rent Professional memberships and licences (PMP, provincial engineering body, and similar)
- Bank charges, merchant/processor fees
- Business travel (flights, hotels, ground transport)
- Subcontractor invoices Interest on business borrowing
Keep the receipt and note the business purpose. “Client dinner with [name] to discuss [project]” beats “meeting” every time.
How Does the 50% Meals Rule Work?
Section 67.1 of the Income Tax Act limits meals and entertainment to 50% deductibility. If you book $200 for a client dinner, only $100 reduces taxable income; the GST/HST input tax credit is also limited to 50% under the parallel Excise Tax Act rule.
A meal you eat alone during a normal workday is not deductible. Client meals, meals while travelling on business, and staff events all pass — with one useful exception: subsection 67.1(2) allows 100% deductibility for staff events open to all employees at a particular place of business, up to six such events per year.
Can I Deduct Professional Development?
Yes, when the training maintains or improves the skills you already use in the business. A CPA taking an update on 2026 tax changes: deductible. A software developer taking an advanced Kubernetes course: deductible. A software developer taking a first-time real estate licensing course to switch careers: treated as capital and not currently deductible.
Can I Put Clothing Through the Corporation?
Only specialized protective gear, branded uniforms, or safety equipment. Business suits, dress shoes, and everyday clothing stay personal — no matter how nice the client’s office is.
Home Office and Vehicle Expenses
How Do I Claim a Home Office Through a Corporation?
Home office is more complicated for an incorporated contractor than for a sole proprietor because the corporation is a separate entity and cannot claim “your” household expenses directly. Two clean structures work; a third does not.
Structure 1: The corporation reimburses you for the business-use portion of home expenses. Calculate the business-use percentage from your workspace (e.g., 15% of square footage used exclusively for the business). Multiply that percentage against rent or mortgage interest, utilities, home insurance, and property tax. The corporation reimburses you monthly against a documented policy. No taxable benefit is created.
Structure 2: The corporation rents part of your home from you. You charge the corporation a market rent for the office space. The corporation deducts the rent. You report the rent as rental income on your personal T1 with the offsetting home expenses claimed against it. (This can affect the principal residence exemption if not structured carefully).
Do not do this: Have the corporation pay 100% of your household bills and call it a business expense. That creates a subsection 15(1) taxable benefit equal to the personal-use portion, with interest and penalties when the CRA finds it.
What Vehicle Expenses Can the Corporation Deduct?
The business-use portion of:
- Fuel or charging
- Insurance
- Repairs, maintenance, tires
- Licence and registration
- Parking and tolls
- CCA on the vehicle
2026 CCA Vehicle Limits:
- Class 10: Passenger vehicles costing $39,000 or less before tax. 30% declining balance.
- Class 10.1: Passenger vehicles costing more than $39,000. Capped at $39,000 for 2026 (up from $38,000 in 2025). Each vehicle sits in its own class. 30% declining balance. No recapture or terminal loss on disposal.
- Class 54: Zero-emission passenger vehicles (fully electric, hydrogen, or plug-in hybrid with battery capacity of at least 7 kWh). Capped at $61,000 before tax. Eligible for 100% first-year immediate expensing when acquired after 2024 and available for use before 2030.
Tax Math Example: If you buy a $65,000 conventional SUV, your CCA runs on $39,000, not $65,000. Buy a $65,000 qualifying electric vehicle, and the CCA base is $61,000 — with a full write-off in year one. The tax math on eligible ZEVs is dramatically better.
2026 Lease/Interest Limits:
- Lease payments: Subject to a $1,100/month cap for leases entered on or after January 1, 2026.
- Loan interest: Subject to a $350/month cap for loans entered on or after January 1, 2026.
What Does the CRA Expect in a Mileage Log?
Date, starting odometer, ending odometer, destination, business purpose, kilometres driven, and client or project. Business-use percentage equals business kilometres divided by total kilometres. A digital log from an app is fine, as long as it is contemporaneous — building the log in April for the previous January does not hold up on audit.
What Are the 2026 Per-Kilometre Allowance Rates?
If your corporation pays you an allowance for using a personally owned vehicle, the 2026 CRA-prescribed reasonable rates are:
- 73¢ per kilometre for the first 5,000 business kilometres
- 67¢ per kilometre after that
- 77¢ / 71¢ in the territories (Yukon, NWT, Nunavut)
Because you are an owner-manager, your corporation can pay you this allowance tax-free based on a proper log (as long as you don’t also receive reimbursement for the same expenses). Note: The prescribed rate for calculating the taxable benefit on employer-paid automobile operating expenses is different: 34¢ per kilometre for 2026.
Should the Corporation or I Personally Own the Vehicle?
- Corporation owns: Claims 100% of eligible costs/CCA against the business-use portion, but personal use creates a standby charge and operating benefit taxable to you. For a $60,000 corporate-owned car with heavy personal use, the annual taxable benefit can easily exceed $10,000.
- You personally own: No standby charge. You keep a mileage log and the corporation pays you a reasonable per-kilometre allowance. This is often cleaner for owner-managers.
GST/HST Tracking
When Do I Have to Register for GST/HST?
Once combined worldwide taxable revenue crosses $30,000 in a single calendar quarter, or over the last four consecutive calendar quarters, the corporation stops being a small supplier and registration is mandatory (set by section 148 of the Excise Tax Act).
If you cross the threshold within a single quarter, you must charge GST/HST on the sale that put you over and register within 29 days. If you cross it over four quarters, you remain a small supplier through those four quarters and the following month, then must register. Many incorporated contractors register voluntarily from day one to recover ITCs on startup costs.
What is an Input Tax Credit (ITC)?
An ITC is the GST/HST you paid on business purchases that you recover on your GST/HST return (e.g., software, professional fees, advertising). If you recover GST/HST as an ITC, do not also include that amount in the deduction on the corporate side — you cannot double-dip. Note the parallel meals rule: the ITC on meals and entertainment is limited to 50% of the GST/HST paid.
When Are GST/HST Returns Due?
Monthly and quarterly filers file and pay one month after the reporting period ends. Do not wait for the T2 to reconcile GST/HST — reconcile it monthly so the liability does not become a surprise. Invoices from suppliers must show the supplier’s GST/HST number, or the CRA can deny the ITC.
Salary vs. Dividends: Which One?
Both work; the answer depends on your income level, CPP goals, RRSP room needs, and family involvement.
What’s the Mechanical Difference?
- Salary: Deductible to the corporation, reported on a T4, requires running payroll (income tax, CPP, CPP2 withholdings, remittances). It creates RRSP contribution room and CPP entitlement.
- Dividends: Paid from after-tax corporate profit, not deductible, reported on a T5. No payroll, no RRSP room, no CPP entitlement.
2026 CPP and CPP2 Costs
If you pay yourself salary, budget for:
- Base CPP: 5.95% of pensionable earnings between $3,500 and $74,600 — max $4,230.45 (employee)
- Employer CPP: Matching 5.95% — another $4,230.45 paid by the corporation
- CPP2: 4% on earnings between $74,600 and $85,000 — max $416 (employee)
- Employer CPP2: Matching 4% — another $416 paid by the corporation
- Total cost of maxing CPP for a salaried owner-manager in 2026: $9,292.90 (split evenly — you pay both since you own the corp). Half is deductible to the corp; half is deducted from your pay.
Worked Example: $100,000 drawn from an Ontario CCPC in 2026 (Assuming $150k corporate active business income, ~11.7% blended Ontario CCPC rate)
Dividends win on raw cash by ~$6,500 here, but salary builds $18,000 of RRSP room and contributes to CPP. Most owner-managers land on a mixed strategy.
Can I Pay My Spouse or Adult Children?
Salary paid to a family member for genuine work at fair market value is fine (document the role, hours, deliverables).
Dividends are harder. Section 120.4 (Tax on Split Income or TOSI) taxes dividends paid to family members at the top marginal rate unless an exclusion applies:
- Excluded business exception: The family member worked an average of 20+ hours per week in the current year or any five prior years combined. Once met, dividends are excluded from TOSI for life.
- Excluded shares exception: Recipient is 25+, owns 10%+ of votes/value, and corp earns <90% of income from services. (A services corporation generally fails this 90% test).
- Reasonable return: Commensurate with actual contribution of labour/capital/risk.
For most incorporated consultants, TOSI killed the classic “dividend sprinkle.” Salary to a spouse for real work stays available; dividends to a passive spouse usually don’t.
Shareholder Loans and the Subsection 15(2) Trap
The shareholder loan account tracks money owed between you and the corporation. Money you put in creates a “due to shareholder” balance; money the corporation advances to you creates a “due from shareholder” balance.
The trap is subsection 15(2). If the corporation advances money to you as a shareholder and the loan is not repaid by the end of the corporation’s next fiscal year, the full principal is added to your personal income for the year the loan was made — retroactively.
Example: Your corporation has a December 31 year-end. You draw $40,000 during 2026 classified as a shareholder loan. It must be repaid by December 31, 2027. Leave it outstanding past December 31, 2027, and $40,000 is added to your 2026 T1, with interest and penalties. Partial repayments do not preserve the exception — the full balance has to clear. The CRA can also invoke subsection 15(2.6) anti-avoidance rules if it sees a “series of loans and repayments” designed to reset the clock.
Two more things to watch:
- Deemed interest benefit (s. 80.4): Even a compliant loan carries a taxable benefit if interest-free. Pay the corporation interest at the CRA prescribed rate within 30 days of year-end to eliminate it.
- Bookkeeping discipline: The vast majority of loan problems come from routine sloppiness — personal expenses paid on the corporate card left unclassified.
Personal Services Business (PSB) Risk
This is the section every incorporated contractor should read twice.
What is a Personal Services Business (PSB)?
A Personal Services Business (PSB) is a corporation providing services where the person doing the work would reasonably be considered an employee of the client if the corporation did not exist. The CRA looks at: Control, ownership of tools, chance of profit/risk, ability to subcontract, and integration into the client’s business. (If your corp employs more than five full-time employees or provides services to an associated corp, PSB rules do not apply).
What Does PSB Status Cost?
A PSB pays a flat 33% federal tax (no Small Business Deduction) plus provincial tax (e.g., 11.5% in Ontario) = 44.5% combined. A regular Ontario CCPC pays roughly 11.7%. On $100,000 of income, PSB status costs you an extra ~$32,800 in corporate tax.
Worse, a PSB cannot deduct normal business expenses. Only salary to the incorporated employee and legal fees to collect income are allowed. Software, home office, marketing, equipment—all denied.
How Do You Protect Yourself?
Bookkeeping cannot change legal substance, but these patterns defend against PSB reassessment:
- Written contracts describing a business-to-business relationship
- More than one paying client (and evidence you are pursuing more)
- Your own tools, equipment, laptop, software licences, and workspace
- Business insurance (E&O, general liability)
- Right to subcontract, and evidence you have
- Project-based pricing rather than hourly-timesheet billing
- Control over how, when, and where work is done
- A marketing presence (website, LinkedIn, branded invoices)
2026 Corporate Tax Rates and T2 Filing
2026 Corporate Tax Rates
For a Canadian-Controlled Private Corporation (CCPC) earning active business income up to the $500,000 small business limit (fed rate is 9% + provincial):
- Ontario CCPC: ~12.2% combined (blended ~11.7% for calendar 2026 with the July 1 cut to 2.2%; 11.2% for years starting on or after July 1, 2026)
- Alberta CCPC: 11%
- British Columbia CCPC: 11%
- Quebec CCPC: 12.2% (falling to 11.2% for years starting after April 29, 2026)
- Manitoba CCPC: 9%
Above $500k, active business income is taxed at the general rate (e.g., 15% fed + 11.5% ON = 26.5%). The $500k limit is reduced when associated taxable capital is between $10M and $50M. Passive investment income above $50k/year grinds down the limit and eliminates it at $150k.
When Is the T2 Return Due?
Six months after the corporation’s fiscal year-end. A December 31 year-end means a June 30 deadline. Every resident corporation files, including dormant and inactive corporations.
When Is the Tax Actually Due?
The T2 filing deadline is six months out, but the balance owing is due earlier:
- Eligible small CCPCs: Three months after year-end
- All other corporations: Two months after year-end
A December 31, 2025 year-end for a small Ontario CCPC means the tax balance is due March 31, 2026. Interest at CRA’s prescribed rate starts running the day after.
Do I Have to File Electronically?
Yes. For tax years starting after 2023, T2 e-filing is mandatory for most corporations. Paper filing triggers an automatic $1,000 penalty.
Checklists and Common Bookkeeping Mistakes
Monthly Bookkeeping Routine
Set aside two hours a month to ensure you never dread the T2:
- Download corporate bank and credit card statements
- Match every transaction to a receipt or invoice
- Reconcile the bank and credit card
- Review A/R and chase overdue invoices
- Review unpaid bills and plan cash
- Reconcile GST/HST collected and paid
- Confirm payroll remittances went out on time
- Review the shareholder loan account
- Update the fixed asset register
- Look at the P&L and set aside cash for corporate tax
Year-End Checklist
Before your tax professional starts the T2, confirm:
- All client invoices issued and A/R reconciled
- All supplier bills entered, prepaid expenses identified
- Bank and credit card accounts reconciled
- GST/HST return reconciled to sales and purchases
- Payroll year-end summary reconciled to remittances
- Every shareholder withdrawal classified (salary / dividend / reimbursement / loan)
- Directors’ resolutions signed for any dividends
- Vehicle log tallied, business-use percentage calculated
- Capital purchases logged with correct CCA class
- Corporate tax instalments confirmed against CRA account
- Prior-year T2 and notice of assessment available
- No “miscellaneous” transactions left unresolved
