Setting up your business

For income tax purposes, a business is an activity that you intend to carry on for profit and there is evidence to support that intention. A business includes:

  • a profession;
  • a trade;
  • a manufacture;
  • an undertaking of any kind; and
  • an adventure or concern in the nature of trade

The three most common types of business structure are:

1. Sole Proprietorship

A sole proprietorship is an unincorporated business that is owned by one person. It is the simplest kind of business structure. If you operate more than one business and you have legal ownership of each, it is your responsibility to register them for GST/HST. One registration will cover all of your businesses. A sole proprietor pays taxes by reporting income (or loss) on a personal income tax and benefit return (T1). The income (or loss) forms part of the sole proprietors overall income for the year.

2. Partnership

A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business.

Each partner contributes money, labor, property, or skills to the partnership. In return, each partner is entitled to a share of the profits or losses in the business. The business profits (or losses) are usually divided among the partners based on the partnership agreement.

In February 2012, the CRA issued a revised version of the Partnership Information Return (T5013). A key change was to schedule 50 of the T5013 return, which now requires information on adjusted cost base (ACB) and at-risk amount (ARA) calculations for partners.

CRA recognize the challenges partnerships & tax preparers might face in meeting these new obligations, and therefore CRA are in the process of revising the schedule 50.

The CRA will not impose penalties on T5013 returns for 2012 or 2013 fiscal periods as a result of incomplete ACB (Adjusted Cost Base) and ARA (Adjusted Risk Amount) information on the schedule 50.

To ease concerns about providing updated ACB and ARA information, CRA will accept returns filed by the due date if they contain the 2011 version (used for the tax year 2012 & 2013) of schedule 50 with complete information on partner identification and the annual transactions between partners & the partnerships. For more information,

3. Corporations

A corporation is a separate legal entity. It can enter into contracts and own property in its own name, separately and distinctly from its owners.

  • It is a separate legal entity with a perpetual existence.
  • It can generally raise larger amounts of capital more easily than a sole proprietorship or partnership.
  • The shareholders cannot claim any loss the corporation sustains.

When forming a corporation, the owners transfer money, property, or services to the corporation in exchange for shares. The owners are referred to as shareholders

How does a corporation pay taxes?

A corporation must file a corporation income tax return (T2) within six months of the end of every tax year, even if it does not owe taxes. It also has to attach complete financial statements and the necessary schedules to the T2 return. A corporation usually pays its taxes in monthly installments. For more details on installment payments and the filing requirements for corporations.

Are you responsible for your corporation’s debts?

As a shareholder of your corporation, you have limited liability. In the strict sense, this means you and the other shareholders are not responsible for the corporation’s debts. However, limited liability may not always protect you from creditors. For example, if a smaller, more closely held corporation wants to borrow money from a bank or other creditor, the creditor may ask for the shareholder’s guarantee that the debt will be repaid. If you agree to this condition, you will be personally liable for that debt if the corporation does not pay it back.

Directors may also be liable to pay amounts owed by the corporation if it has failed to deduct, withhold, remit or pay amounts as required by the Income Tax Act, Employment Insurance Act, Canada Pension Plan, Excise Act, 2001, and Excise Tax Act.

The type of structure you choose has a significant effect on the way you report your income, the type of returns you complete each year, and many other matters. One of the most important concerns will be your liability for business debts.