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Reading though the Wikipedia article on Types of Business Entities in Canada, I can see how some Freelancers would fit in different parts of the list:

Rather, Canadian businesses are generally formed under one of the following structures:

SP (Sole Proprietorship): No formal business structure is established
GP (General Partnership): Either a formal structure with a partnership agreement, or an informal structure, in which case the Partnerships Act for the province will apply
LP (Limited Partnership): An investment structure, limiting both the liability and the participation of the investor. An investor who takes an active role will be deemed a general partner, and become exposed to unlimited liability.
Corporation
Joint Venture: A business activity shared by two or more business entities. The joint venture's activities must be finite in terms of either time or scope.

I have also heard that freelancers should change their entity to something such as a corporation, mostly for tax purposes. What benefits does one gain by becoming a Corporation, and how would one go about it legally?

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The particular break even point from Sole Proprietorship to Corporation depends on your personal circumstances but tends to be at around the 40-60K / year point. Talk to an accountant. Be aware that having a corporation also takes more time, from the time to set one up with a lawyer to the added time handling accounting (even if you are working with an accountant), and the added time of maintaining a separate bank account, credit card entity, etc.. The upfront costs range from 1.5 to 4K, and the yearly costs are about 3-500.

You'll want to use a lawyer because the cost of making a mistake or an oversight aren't worth saving $1500. You'll want to shop around because some lawyers overcharge substantially for setting up a corporation, and your needs are very simple, so you just want someone who specializes in churning out small business corporations.

Apart from the smaller tax burden, there is also some liability insulation. Downsides include that it is much harder to get valid house insurance (BCAA will do it). It also makes it easier to share your tax burden with your life partner in ways that can be quite beneficial. And if you use a lot of non-essential medical services (massage, physio-therapist prescribed personal training, etc.) you can set up a medical trust and save a lot of taxes that way.

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