Information for Canadian Small Businesses : Chapter 1 – Setting up your business

From: Canada Revenue Agency

Finding information on the web

You can find information for businesses and search by topic at Businesses.

You can also find a list of websites for small businesses at Information for Canadian Small Businesses – Addresses on our website.

For more information on starting a business, see Canada Business Network (Government Services for Canadian Businesses). There you will find information from the federal government, provincial and territorial governments, and other sources.

Business structure

A business is an activity that you intend to carry on for profit and there is evidence to support that intention.

The definition of a business from the Income Tax Act and the Excise Tax Act includes:

  • a profession
  • a calling
  • a trade
  • a manufacture
  • an undertaking of any kind

It does not include an office or employment. For income tax purposes only, a business also includes an adventure or concern in the nature of trade.

For more information, see archived Interpretation Bulletin IT-459, Adventure or Concern in the Nature of Trade.  

For GST/HST purposes only, a business also includes any activity whether or not it is engaged in for profit and any regular or continuous activity that involves supplying property by way of lease, licence or similar arrangement. 

The three most common types of business structures are:

The type of structure you choose for your business has a significant effect on the way you report your income. The business structure impacts the type of tax returns you file each year, and many other matters.

Sole proprietorship

A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest kind of business structure.

The owner of a sole proprietorship has sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business. If you are a sole proprietor, you also assume all the risks of the business. The risks extend even to your personal property and assets.

If you are a sole proprietor, you pay personal income tax on the net income generated by your business.

You may choose to register a business name or operate under your own name or both.

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

Like a sole proprietorship, a partnership is easy to form. In fact, a simple verbal agreement is enough to form a partnership. However, most partnerships are governed by a written agreement setting out rules for partners entering or leaving the partnership, the division of partnership income, and other matters.

The partnership is bound by the actions of any member of the partnership, as long as these are within the usual scope of the operations.

A partnership is considered to be a person for GST/HST purposes. Therefore, it is important that you structure your affairs in a clear and understandable manner, since your reporting and remittance of GST/HST will depend on the type of structure you choose. If you are a partnership, you may want to set up a separate bank account, have a written partnership agreement, and take other steps to make sure that it is clear that the business is not a sole proprietorship.

For more information on partnerships, go to Income Tax Folio S4-F16-C1, What is a partnership?

Corporation

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 may have some of the following features:

  • it is a separate legal entity with a lasting existence
  • it can generally raise large amounts of capital (money or other assets) more easily than a sole proprietorship or partnership
  • the shareholders cannot claim any loss the corporation incurs

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

You can buy and sell shares of a corporation without affecting the corporation's existence. A corporation continues to exist unless it winds up, amalgamates, or gives up its charter for reasons such as bankruptcy.

You set up a corporation by completing articles of incorporation and sending the documents to the appropriate provincial, territorial, or federal governments.

Corporation's debts

As a shareholder of your corporation, you have limited liability. This means that 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.

This applies to taxes owing as well. If your corporation owes taxes and has obtained a loan or secured a line of credit, an advance under the loan or line of credit can be seized on account of the corporation's tax arrears. Even though the proceeds of the advance have been paid to the CRA, the corporation is deemed to have received the advance and is liable to the lender as such. When you have personally guaranteed the loan or the line of credit for the corporation, you and the corporation will be jointly accountable for the amounts seized.

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, the Employment Insurance Act, the Canada Pension Plan, the Excise Act 2001, and the Excise Tax Act.

For more information on director's liability, see Information Circular IC89-2R3, Directors' Liability.

Business number

Your first step to doing business with the CRA

The first time you register a business with us, we assign it a nine-digit business number (BN). The BN system is in place to streamline the interactions between businesses and the CRA.

The BN is part of a program account. There are four common CRA business program accounts. Their account identifiers are:

  • RT GST/HST
  • RP – payroll deductions
  • RC – corporation income tax
  • RM – import/export

A program account number has three parts – a business number, a program identifier, and a reference number. The program account number is 15 characters, which includes:

  • the nine-digit BN to identify the business
  • a two-letter code to identify the program
  • a four-digit reference number to identify each account in a program a business may have

For example, your account number might look like this:

1 2 3 4 5 6 7 8 9 RP 0002

If you had only one account (GST/HST for example), it would be designated as follows:

1 2 3 4 5 6 7 8 9 RT 0001

When making payments or enquiries related to your account, provide the nine-digit BN, the two-letter program identifier, and the four-digit reference number.

You can register for a BN by Internet, telephone, fax, or mail. The Business Registration Online service is secure, easy to use, and practical. It is a one-stop, self-serve application that lets you register for a BN and any of the four common CRA business program accounts. At the same time, you can register for Ontario, New Brunswick, Nova Scotia, and British Columbia programs. If your business's mailing address is in Quebec, visit Revenu Québec's web site.

Note

Not all businesses are required to have a BN. It is important that you review the information for each type of account before registering. For more information on these accounts and registering for any of these accounts, go to Business number (BN) registration.

Are you doing business in Quebec?

For businesses located in Quebec, you have to register your program accounts for payroll, import-export, or corporation income tax with the CRA. However, you will have to register your GST/HST program accounts with Revenu Québec, instead of the CRA, unless you are a non-resident.

If you are registering for GST/HST program accounts only

If you are registering for GST/HST program accounts only and you do not need to register for a BN with us. For more information or to register, visit Revenu Québec's website or contact Revenu Québec at:

Revenu Québec
3800, rue de Marly
Québec  QC G1X 4A5

Telephone: 1-800-567-4692
Outside Canada: 1-418-659-4692

Do you need a BN?

If you need any of the four common CRA program accounts, you need a BN.

Before you register for a BN, you need to decide on some details about your business operation. For example, decide on the name of the business, its location, the legal structure (sole proprietorship, partnership, or corporation), and the fiscal year-end. You should have an idea of what the amount of sales your business will generate each year. This information will help you complete Form RC1, Request for a Business Number.

If you are registering for a GST/HST account, it is important that you provide all of the information required to register. If you register for the GST/HST and your business claims a net tax refund, the refund may not be paid if this information is inaccurate or incomplete.

Notes

If you are a sole proprietor or a partner in a partnership, you will use your social insurance number (SIN) to file your income tax and benefit return, even if you have a BN.

If you decide to incorporate, you will need a BN to identify your instalment payments of corporate income tax to your corporate income tax account.

For more information about the BN, go to Registering your business.

Reasons to register

You only need to register for those business accounts for which you need a BN to meet your legal obligations.

For example, you do not have to register for the GST/HST if you are a small supplier, unless you carry on a taxi business. You are a small supplier if your total revenues from worldwide taxable supplies of property and services (including those of your associates) were $30,000 or less in the last four consecutive calendar quarters combined and in any single calendar quarter. The threshold is $50,000 if you are a public service body such as a charity, non-profit organization, municipality, university, public college, school authority, or hospital authority.

If you think your revenues will be more than $30,000 (or $50,000 if you are a public service body), it is probably wise to register for the GST/HST as soon as possible. Registering for the GST/HST is the same as registering for a BN. However, once you are registered, you must charge GST/HST on your taxable supplies of property and services (other than zero-rated supplies). You would also have to file a GST/HST return whether or not you are a small supplier. You have to stay registered for at least one year before you can deregister if you are still a small supplier.

A person may incur a number of expenses in the course of starting a business, even before any taxable supplies are made. Registering for GST/HST early may give you certain benefits. For example, if you register you may be eligible to claim input tax credits (ITCs) for the GST/HST paid or payable on property and services you acquire to start your business when certain conditions are met. For more information, see Guide RC4022, General Information for GST/HST Registrants.

If you intend to import goods into Canada, you should open an import/export account before you import the goods. This will help avoid delays at the port of entry.

If you plan to have employees, you should open a payroll deductions account. This account will let you make regular payroll deductions for your employees and make payroll deduction payments on time. For information on how to make payroll deductions, see Chapter 4 – Payroll deductions and remittances.

Keeping records

The benefits of keeping records

  1. Complete and organized records help identify the sources of your income and can help you decide if you should charge GST/HST.

    You may receive cash or property from many different sources. If you do not have records showing your income sources, you may not be able to prove that some sources are non-business or non-taxable for income tax purposes. You also need to have complete and organized records to show that your supplies are zero-rated or not subject to GST/HST.

  2. Complete and organized records can mean tax savings.

    Good records serve as a reminder of the expenses you can deduct and the input tax credits (ITCs) you may be eligible to claim. If you do not record your transactions, you may forget some of your expenses or ITCs when you prepare your income tax or GST/HST returns. For more information on ITCs, see Guide RC4022, General Information for GST/HST Registrants.

  3. Complete and organized records are helpful if we audit your income tax or GST/HST returns.

    If auditors cannot determine your income or taxable revenues because your records are incomplete, they will have to use other methods to establish your income and GST/HST net tax. This will cost you time. In addition, if your records do not support your claims, they could be disallowed.

  4. Your records will help keep you informed about the financial position of your business.

    You need good records to establish your profit or loss, as well as the value of your business. Information from good records can also tell you what is happening in your business and why. The successful use of records can show you trends in your business, let you compare performance in different years, and help you prepare budgets and forecasts.

Legal requirements for keeping records

All records, including paper documents and those stored in a digital medium, must be kept in Canada or made available in Canada at our request. The records must be in English or French.

You can keep your documents outside Canada if you get written permission from us.

What records should you keep?

You must keep records of all your income. Also, keep all receipts, invoices, vouchers, and cancelled cheques concerning outlays of money. These outlays include:

  • salaries and wages
  • operating expenses such as rent, advertising, and capital expenditures
  • miscellaneous items such as charitable donations

If you import goods into Canada, your records must show the price you paid for imported goods and list their origin and description. They must also include any paperwork about the reporting, release, and accounting of the goods, as well as the payment of duties and taxes.

Your records must be permanent

Regardless of the accounting method you use, your records must be permanent. They must contain a systematic account of your income, deductions, credits, and other information you need to report on your income tax and GST/HST returns.

What information should your records contain?

Your records must:

  • let you determine how much tax you owe, or the tax, duties, or other amounts to be collected, withheld, or deducted, or any refund or rebate you may claim
  • be supported by vouchers or other necessary source documents. If you do not keep your receipts or other vouchers to support your expenses or claims, and there is no other evidence available, we may reduce the expenses or claims you have made

Your records must meet the requirements of the law. Therefore, incomplete records that use approximate amounts instead of actual amounts are not acceptable.

Note

If you are required to charge GST/HST, you have to include specific information on your invoices. The information you have to include depends on the amount of the invoice. For more information, see Guide RC4022, General Information for GST/HST Registrants.

Retaining and destroying records

The six-year requirement

You have to keep records (other than certain documents for which there are special rules) for six years: 

  • from the end of the last tax year to which they relate for income tax purposes
  • after the end of the last year to which they relate for GST/HST reporting purposes
  • after the goods are imported or exported 

If you filed your income tax return late, keep your records and supporting documents for six years from the date you filed the late return. 

The time frame for keeping records usually starts from the last year you used the records, not the year the transaction occurred or the record was created. 

If you filed an objection or appeal, you must keep all necessary records until the latest of the following dates: 

  • the date the objection or appeal is resolved
  • the date for filing any further appeal has passed
  • the six-year record keeping period has passed

Request for early destruction

If you want to destroy your records early, you have to get written permission from the CRA

To get this permission, you or your authorized representatives can do one of the following:

In addition to our requirements, there might be other federal, territorial, provincial, and municipal laws that require you to keep records. Any permission received from the CRA for early record destruction does not extend to records you are required to keep because of these other laws.

For more information, see Information Circular IC78-10R5, Books and Records Retention/Destruction.

Bringing assets into a business

You might transfer your personal assets to your business.

If you are operating a sole proprietorship, this is a reasonably simple process. The Income Tax Act requires that you transfer these assets to the business at their fair market value (FMV). This means that we consider you to have sold the assets at a price equal to their FMV at that time. If this amount is greater than your original purchase price, you must report the difference as a capital gain on your income tax and benefit return.

Your business will show a purchase of these assets, with a cost equal to the FMV at the time of the transfer. This is the value that you will add to the capital cost allowance (CCA) schedule for income tax purposes.

For income tax purposes, when you transfer the property to a Canadian partnership or a Canadian corporation, you can transfer the property for an elected amount. This amount may be different from the FMV, as long as you meet certain conditions. The elected amount then becomes your proceeds for the property transferred, as well as the cost of the property to the corporation or partnership.

The rules regarding these transfers of property are technical. They allow you to change your business type from a sole proprietorship to a corporation or a partnership, or from a partnership to a corporation, on a tax-free basis.

For more information, see archived Interpretation Bulletin IT-291R3, Transfer of Property to a Corporation Under Subsection 85(1), Information Circular IC76-19R3, Transfer of Property to a Corporation Under Section 85, and archived Interpretation Bulletin IT-413R, Election by Members of a Partnership Under Subsection 97(2).

For GST/HST purposes, you may be able to claim an (ITC) for the GST/HST paid or payable on property such as capital property and inventory, that you have on hand on the day you register. For more information, see Guide RC4022, General Information for GST/HST Registrants.

Buying a business

When you are considering becoming a business owner, you have the option of buying an existing business or starting a new one. The option you choose will affect how you will account for the purchase of the business assets for income tax purposes.

When you buy a business, you generally pay a set amount for the entire business. In some cases, the sale agreement sets out a price for each asset, a value for the inventory of the business and, if applicable, an amount that can reasonably be attributed to goodwill.

If the individual asset prices are set out in the sale agreement, and the prices are reasonable, then you could use these prices to calculate your claim for capital cost allowance (CCA).

If the individual asset prices are not set out in the contract, you have to decide how much of the purchase price you should reasonably attribute to each asset, how much to inventory, and how much, if any, to goodwill. These amounts should coincide with the amounts the vendor determined when reporting the sale.

The amount you attribute to each asset should be its FMV. You should attribute to goodwill the balance of the purchase price that remains after you attribute the FMV to each asset and to inventory.

Example

You buy a business for $480,000. The FMV of the net identifiable assets of the business is as follows:

Accounts receivable

$80,000

Inventory

$40,000

Land

$120,000

Building

$200,000

Total net identifiable assets

$440,000

You can determine the value of the goodwill by subtracting the total value of the net identifiable assets from the purchase price:

Purchase price

$480,000

Minus
Net identifiable assets


$440,000

Amount assigned to goodwill

$40,000

Once you have determined the values for the assets and the goodwill, sort the assets into the appropriate classes for the purpose of claiming the capital cost allowance (CCA). On January 1, 2017, the eligible capital property system was replaced with new capital cost allowance (CCA) class 14.1 with transitional rules.

Goodwill and certain other intangible properties are no longer considered to be eligible capital expenditures. Instead, these properties are now treated as depreciable property in new Class 14.1. For more information see Chapter 5 "Eligible capital expenditures" in Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.

Treat the value of the inventory as a purchase of goods for resale, and include it in the calculation of cost of goods sold in your income statement at the end of the year.

GST/HST when you buy a business 

For GST/HST purposes, if you buy a business or part of a business and acquire all or substantially all (at least 90%) of the property that can reasonably be regarded as necessary to carry on the business, you and the vendor may be able to jointly elect to have no GST/HST payable on the sale by completing Form GST44, Election Concerning the Acquisition of a Business or Part of a Business. You cannot use this election if the seller is a registrant and you are not a registrant. In addition, you must buy all or substantially all of the property, not only individual assets.

For the election to apply to the sale, you have to be able to continue to operate the business with the property acquired under the sale agreement. You have to file Form GST44 on or before the day you have to file the GST/HST return for the first reporting period in which you would have otherwise had to pay GST/HST on the purchase.

Even when you use the election, GST/HST will still apply to a taxable supply of a service made by the seller; a taxable supply of property made by way of lease, licence, or similar arrangement; and, if the buyer is not a GST/HST registrant, a taxable sale of real property.

Shares of a corporation 

Another way of acquiring an existing business is to buy the shares of a corporation. This does not affect the cost base of the assets of the business. A corporation is a separate legal entity and can own property in its own name. A change in the ownership of the shares will not affect the tax values of the assets the corporation owns. Generally, the purchase of shares of a corporation is not subject to GST/HST.

For more information on changes to your business, go to Changes to your business.

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