Start with the PSB question
The profile is common in engineering: a P.Eng incorporates, often because the agency or client required it, and spends eighteen months embedded in one client's project team, working the client's hours with the client's systems, billed by the day. If, without the corporation, that person would reasonably be the client's employee, the CRA can treat the corporation as a personal services business. The consequences are severe: no small business deduction, no general rate reduction, an extra 5% federal tax, and deductions limited to little beyond the salary paid to the incorporated employee.
| Genuine consulting corporation | Personal services business | |
|---|---|---|
| Ontario rate on the first $500,000 | About 12.2% combined | About 44.5% combined |
| Deductible costs | Ordinary business expenses | Essentially salary and benefits paid to the worker |
| Retained earnings | Cheap capital for the next project | A trap that compounds each year |
What genuinely reduces the risk is substance, not contract wording: concurrent clients, fixed-fee deliverables that carry real financial risk, your own professional liability insurance and equipment, and the right to subcontract or substitute. Where the facts are bad, the honest plan is to pay everything out as salary so nothing is left taxed at PSB rates, and to build toward a second client before relying on the corporation's rate at all. We give that assessment in writing through Tax Planning & Advisory, before year-end locks the outcome in.
Pay yourself against a lumpy revenue curve
Milestone billing makes engineering income arrive in surges, and owner pay should be designed against that curve rather than copied from last year. Salary creates RRSP room and CPP coverage and smooths personal income through thin quarters; dividends flex with cash. A few timing tools do most of the work:
- The year-end bonus accrual. A bonus deducted this year can be paid up to 180 days after year-end, letting a fat milestone year fund January's payroll while the deduction lands where it belongs.
- Instalment resets. After an unusually strong year we recalculate corporate and personal instalments immediately, so one big project does not dictate a year of oversized remittances.
- Retention at 12.2%. Profit left in the corporation at the small business rate is the cheapest financing an engineering firm has for its next hire or its receivables gap. The deferral only works if the money genuinely stays invested in the business.
One caution for firms that accumulate: once passive investment income inside the group passes $50,000 in a year, the small business limit starts to shrink. A firm salting away milestone profits into a portfolio needs that watched annually. For a principal in their fifties with a long salary history, an individual pension plan can beat RRSP limits and gives the corporation a deduction; it suits a firm with steady profits far better than a consultant living contract to contract.
Household shareholders meet TOSI
Because engineers incorporate through ordinary corporations, a spouse or adult child can hold shares, but owning shares and receiving low-taxed dividends are different things. TOSI taxes dividends to family members at the top rate unless an exclusion applies, and the excluded-shares route usually fails for consulting firms because their income is almost entirely from services. The exclusions that do work in practice: the family member is genuinely engaged in the business, averaging 20 hours a week; the amount is a reasonable return for real contributions; or the owner is 65 or older, where splitting with a spouse mirrors pension splitting. Wages for real work, at market rates, remain the simplest defensible way to pay family, and the discipline is documentary: a role description and hours record that support the rate if the CRA ever asks.
Plan the exit years before the exit
Engineering firms sell: to staff through gradual buy-ins, to consolidators, occasionally to a client. Each shareholder's lifetime capital gains exemption, now $1.25 million, only applies if the shares qualify, and a corporation stuffed with portfolio investments from years of retained milestones can fail the purity tests, 90% active business assets at sale and 50% throughout the prior 24 months. Cleaning that up takes time, sometimes a reorganization through Corporate Restructuring, so the file should open years early. Firms productizing an internal tool have a second reason to plan ahead: routing development spending deliberately supports the research credits covered on our tax services page, and a product line changes what a buyer is even purchasing.
