Whether you are the owner of an established foreign business looking to expand into Canada, or are a local entrepreneur eager to set up a new business here, you will want to ensure you know the full income tax implications of your particular type of business.
For income tax purposes, a “business” is an activity that you intend to carry on for profit and there is evidence of that intention. A business includes: a profession; a calling; 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 structures are:
- sole proprietorship
- corporation (discussed further below).
The type of structure you choose significantly affects many things, like how you report your income and the type of returns you file annually. As entrepreneurs, you will want to choose carefully the structure that is most suited to making your business profitable. As legal experts with business acumen, we at HLF can help you with this critical initial decision.
Canada Revenue Agency
The Canada Revenue Agency (CRA) is the federal government agency that administers tax laws for the Government of Canada and for most provinces/ territories and delivers various social and economic benefit and incentive programs through the tax system.
It collects federal and provincial/territorial individual and corporate income taxes for most provinces/ territories, including Ontario.
The CRA also administers and collects the Goods and Services Tax / Harmonized Sales Tax (GST/HST) and such other taxes as Canada Pension Plan (CPP) contributions, Employment Insurance premiums (EI), excise duties on alcohol and tobacco products, excise taxes on gasoline and fuel-inefficient vehicles, and a tax on insurance premiums.
The CRA also administers Canada’s international tax agreements with other countries. While the CRA administers the law, the Department of Finance Canada plans the government’s fiscal and tax policy and introduces a yearly budget with proposed amendments to existing legislation.
A sole proprietorship is the simplest kind of business structure. It is an unincorporated business that is owned by one person.
If you are a sole proprietor, you must pay personal income tax on all revenue generated by your business. You also assume all the risks of the business, which extend to your personal property and assets.
You might have to register for and collect GST/HST if you provide taxable supplies in Canada, and you are not a small supplier.
You may choose to register a business name (BN) or operate under your own name, or both. You pay taxes by reporting income (or loss) on a personal income tax and benefit return. The income (or loss) is part of your overall annual income.
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 can share its profits or losses.
A partnership does not pay income tax and does not file an annual income tax return.
Rather, each partner includes a share of the partnership income (or loss) on a personal, corporate, or trust income tax return. A partner must do this even if she did not actually get her share in money or in credit to her partnership’s capital account.
In certain circumstances, a partnership that carries on a business in Canada, or a Canadian partnership with Canadian or foreign operations or investments, has to file a Partnership Information Form for each fiscal period of the 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. Since a corporation has a separate legal existence, it has to pay tax on its income, and so must file its own income tax return.
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 or quarterly installments.
The tax year for a corporation is its fiscal period. A corporation may be required to register for and collect GST/HST if it provides taxable supplies in Canada, and is not a small supplier.
Directors may be liable to pay amounts owed by the corporation if it has failed to deduct, withhold, remit or pay amounts required by various tax laws, including those about income tax, employment insurance, Canada Pension Plan, and excise tax.
We can help explain the complicated rules about fiscal periods. Essentially, you have to report your business income annually.
Business income is generally reported on a calendar-year basis for: sole proprietorships; professional corporations that are members of a partnership; and partnerships in which at least one member is an individual, professional corporation, or another affected partnership.
If you are a sole proprietor or if you are in a partnership in which all the members are individuals, you can choose to have a non-calendar year fiscal period.
A corporation’s tax year is its fiscal period. A fiscal period cannot be longer than 53 weeks. A new corporation may choose any tax year-end as long as its first tax year does not exceed 53 weeks from the date it was either incorporated or formed as a result of an amalgamation.
Objections and Appeals
If you disagree with the CRA’s assessment of your income tax, GST/HST or excise duty, you can file an objection. We can assist you with the objection process and advise you whether the law has been applied incorrectly.
If the CRA dismisses your objection, you can appeal to the Tax Court of Canada. The Tax Court of Canada deals with appeals under either the informal or general procedure. We can advise you on the procedure that is right for you and represent you in court.
As you might expect, the tax regime in Canada is complex and ever-changing. Our team of knowledgeable legal experts can guide you through the many tax challenges that your business faces.
HLF can help you make intelligent tax planning choices that will maximize your revenues and minimize your legal risks. We can assist you by providing advice about reporting earnings and paying income tax on your business’s profits. We can represent you if you object to CRA’s assessment of your payable taxes.
For more information on Tax Implications of Setting Up Your Business, please contact us.