Setting up your business
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For income tax purposes, we define a business as an activity where there is a reasonable expectation of profit and there is evidence to support that intention.
For goods and services tax/harmonized sales tax (GST/HST) purposes, 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.
Not all businesses need a business number (BN) and CRA program accounts. For more information, go to Business number registration.
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.
To find out the impact each structure would have on your business, consult the following list below:
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.
Reporting business income as a sole proprietor
A sole proprietor pays taxes by reporting income (or loss) on a T1 income tax and benefit return.
If you are a sole proprietor, you or your authorized representative have to file a T1 return if you:
- have to pay tax for the year
- disposed of a capital property or had a taxable capital gain in the year
- have to make Canada Pension Plan/Quebec Pension Plan (CPP/QPP) payments on self-employed earnings or pensionable earnings for the year
- want to access employment insurance (EI) special benefits for self-employed persons
- received a demand from us to file a return
You also need to file a return if you are claiming an income tax refund, a refundable tax credit, a GST/HST credit, or the Canada Child Benefit. You should also file a return if you are entitled to receive provincial tax credits.
The list above does not include every situation where you might have to file.
When you file your income tax and benefit return, you must include financial statements or one or more of the following forms, as applicable:
- Form T2125, Statement of Business or Professional Activities
- Form T2042, Statement of Farming Activities
- Form T2121, Statement of Fishing Activities
- Form T1163, Statement A - AgriStability and AgriInvest Programs Information and Statement of Farming Activities for Individuals
- Form T1164, Statement B - AgriStability and AgriInvest Programs Information and Statement of Farming Activities for Additional Farming Operations
- Form T1273, Statement A - Harmonized AgriStability and AgriInvest Programs Information and Statement of Farming Activities for Individuals
- Form T1274, Statement B - Harmonized AgriStability and AgriInvest Programs Information and Statement of Farming Activities for Additional Farming Operation
We will also accept a computer-generated version of these forms.
Registering for GST/HST as a sole proprietor
You may be required to register for the goods and services tax/harmonized sales tax (GST/HST) if you provide taxable supplies in Canada.
For more information, go to Registering for a GST/HST account.
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.
Reporting income as a partnership
A partnership by itself does not pay income tax on its operating results and does not file an annual income tax return. Instead, each partner includes a share of the partnership income (or loss) on a personal, corporate, or trust income tax return.
Each partner has to file financial statements or one of the forms referred to above that outlines the statement of business activities.
A partnership that carries on a business in Canada, or a Canadian partnership with Canadian or foreign operations or investments, has to file form T5013, Statement of Partnership Income, for each of the fiscal periods of the partnership where, one of the following occurs:
- at the end of the fiscal period, the partnership has an absolute value of revenues plus an absolute value of expenses of more than $2 million, or has more than $5 million in assets
- at any time during the fiscal period:
- the partnership is a tiered partnership (has another partnership as a partner or is itself a partner in another partnership)
- the partnership has a corporation or a trust as a partner
- the partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership
- the Minister of National Revenue asked in writing for a completed form T5013, Statement of Partnership Income
For more information, go to Partnership and information return filing requirements or guide T4068, Guide for the Partnership Information Return (T5013 Forms).
Registering for GST/HST as a partnership
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?
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.
Reporting income as a corporation
A corporation has to file a T2 corporation income tax return no later than six months after 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 return.
A corporation usually pays its taxes in monthly or quarterly instalments. For more information on instalment payments and the filing requirements for corporations, go to guide T4012, T2 Corporation – Income Tax Guide, or guide T7B CORP, Corporation Instalment Guide, or go to Payments to the Canada Revenue Agency.
The tax year for a corporation is its fiscal period. For more information on corporations, go to Corporations.
Filing GST/HST returns
Corporations also have reporting periods for which they have to file their GST/HST return. For more information on these returns, including reporting periods, go to Goods and services tax/harmonized sales tax (GST/HST).
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, go to Information Circular IC89-2R3, Directors' Liability.
Forms and publications
- Video series: Businesses video gallery
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