The law recognizes three distinct business entities:
There are certain advantages and disadvantages to each business structure, which will be briefly covered here.
Setting
Up Your Business:
A business is an activity that you conduct for profit or with a reasonable expectation of profit. There are three types of businesses: Sole Proprietorships, Partnerships, and Corporations. The way your business is taxed has a lot to do with the way your business is set up.
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 profits, claims all losses, and does not have separate legal status from the business.
If you’re a Sole Proprietor, you pay personal income tax and all revenue generated by your business. You also assume all the risk of the business. This risk extends even to your personal property and assets.
As a Sole Proprietor, you have to register for GST/HST if your worldwide annual taxable revenues are more than $30,000.00
It’s easy to set up a Sole Proprietorship. Simply operate as an individual or as a registered, unincorporated business. If you operate as an individual, just bill your customers or clients in your own name. If you operate under a registered business name, bill your customers or clients in the business’s name. If your business has a name other than your own, you’ll need a separate bank account to process cheques payable to your business.
How
Does A Sole Proprietor Pay Taxes?
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 Proprietor’s overall income for the year.
If you’re a Sole Proprietor, you must file a personal income tax and benefit return if you:
· Have to pay tax for the year
· Dispose of a capital property or had a taxable capital gain in the year;
· Are required to make Canada Pension Plan/Quebec Pension Plan contributions on self-employed earnings or pension able earnings for the year; or
· Receive a demand from the CCRA to file a return
The list above does not include every situation where you may be required to file but your Strategic service provider will make sure every possible consideration is given to your particular filing needs.
As a Sole Proprietor, you may have to pay your income tax by installments. You may also need to make installment payments for CPP contributions on your own income. Remember to budget for these payments. For more information contact your Strategic Tax & Business service provider.
For GST/HST, Sole Proprietors have reporting periods for which they have to file a return. For more information consult with your Strategic Tax & Business service provider.
A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on 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 of 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. But if money and property are at stake, you should have a written agreement.
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 by itself does not pay 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 also has to file either financial statements or one of the forms as specified by your Strategic Tax & Business service provider.
A partnership has to file a partnership information return if, throughout the fiscal period it has six or more members or if one of its members is a member of another partnership. Your Strategic tax professional can provide you with more details if required.
For GST/HST purposes, a partnership is considered to be a separate person and must file a GST/HST return and remit tax where applicable.
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 therefore must file its own income tax return. It must also register for the GST/HST if its taxable worldwide annual revenues (including those of associates) are more than $30,000.00.
A corporation is set up by filling out an article of incorporation, and filing it with the appropriate provincial, territorial, or federal authorities.
A corporation must file a corporation tax return (T2) within six months of the end of every taxation year, even if it doesn’t owe taxes. It also has to attach complete financial statements and necessary schedules to the T2 return. A corporation generally pays its taxes in monthly installments.
For GST/HST, corporations have reporting periods for which they have to file a return. For more information see your Strategic Tax & Business service provider.
The taxation year for a corporation is its fiscal period. For more information on fiscal periods speak with a Strategic Tax & Business service provider.
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 shareholders guarantee that the debt will be repaid. If you agree to this condition, you’ll 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 you have personally guaranteed any loan on behalf of your corporation, the CCRA will claim the amount of taxes owing up to the limit of the loan guarantee.
Good
Records Can Help You Identify The Sources Of Your Income
You may receive cash or property from many different places. If you don’t have records showing your income sources, you may not be able to prove that some sources are non-business or non-taxable
Well
Kept Records Can Mean Tax Savings
Good records serve as a reminder of deductible expenses and input tax credits. If you don’t record your transactions, you may forget some of your expenses or input tax credits when the time comes to prepare your income tax or GST/HST returns.
Well-kept
records can prevent most of the problems you might encounter if an audit of
your income tax or GST/HST is conducted
If your records are so incomplete that auditors cannot determine your income
from them, the auditors will have to use other methods to determine your income.
If your records do not support your claims, they could be disallowed.
4.
Your Records Will Keep You Better
Informed About The Financial Position Of Your Business.
You need good records to establish your profits or loss, and 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, lets you compare performance in different years, and can help you
Prepare budgets and forecasts.
5.
Proper Books And Records May Help You
Get Loans From Banks And Other Creditors
Creditors need accurate information about your current financial position before
They give you a loan. You can’t give them this information if you don’t keep
Organized records. Also, good records show potential creditors that you know
what’s going on with your business.
TAX DEDUCTIBLE EXPENSES
You can “write-off” expenses that are directly related to earning your income. Some examples are:
1) Advertising
2) Bad Debts
3) Fuel Costs
4) Insurance – commercial premiums on equipment, buildings, machinery that you use to earn income. “NOTE” Life insurance is only deductible if required by the bank on a loan.
5) Business taxes, fees licenses, dues, memberships and subscriptions.
6) Interest on business loans
7) Maintenance & Repairs
8) Management & Administration fees
9) Meals & Entertainment – deductible at 50% only, including taxes, gratuities, or gift certificates for restaurants that you give to clients
10) Motor vehicle expenses (Business portion only) keep an accurate Log Book. The type of expenses are licence and registration fees, fuel, insurance, interest on vehicle loans, maintenance and repairs and leasing costs (within certain limits)
11) Office expenses either commercial lease, or if you work out of your home, a percentage of household expenses.
12) Supplies for business
13) Legal, accounting & other professional fees
14) Property taxes
15) Rent for business
16) Salaries, wages & benefits “NOTE” Wages paid to family members must be actually paid and not an accounting entry, they must be reasonable amounts for the work done and skill level of the family member, and must, at the maximum, be the same as you would pay a stranger for the same work.
17) Travel – full deduction for fares and hotels, 50% for meals & entertainment, convention expenses
18) Telephone & Utilities
19) Disability related modifications fully deductible in the year of the expense
20) Equipment leasing costs
21) Private health plan
22) Allowance for eligible capital property
23) Capital cost allowance
24) Charitable donations
Your Strategic Tax & Business service provider will ensure that you receive every possible deduction available to you and your business.