Set up a business in Canada – what you should know

In general, it is easy to set up the business in Canada. However, there are a lot of details that you may need to pay attention to. 

First of all , type of business structures is the first thing that you need to make up your mind.

• Sole Proprietorship

A sole proprietorship means an individual who operates a business, and is generally the simplest way to set up business. The sole proprietor is subject to unlimited liability. In practice, individuals can register master business license in Ontario and also set up business account with the CRA. The business can start to run.

• Partnership

The second type of business structure is a partnership, which combines two or more individuals’ resources to carry on business with an expectation to making a profit. Partners share in the profits of the partnership according to the terms of the agreement. Again, it is crucial to have certain key items written in the partnership agreement to avoid any future disagreement. From tax perspective,a partnership is a flow-through entity, which means it does not have any tax obligation. But partners will be ultimately responsible for tax obligation resulting from any income distributed from the partnership. In addition, partnership structure has certain features which makes it more favorable than corporations.

• Corporation

A business corporation is formed by one or more persons(shareholders) to carry on business for profit. The key advantage of incorporation is limited liability. Shareholders agreement are required to be written up as to protect the shareholders in the event of a disagreement or dissolution of the business. In many cases, shareholders’ dispute can be avoided if an initial agreement has been prepared to indicate the obligation and responsibility for respective shareholders. Another area that needs your attention is that the individual incorporated the business may not become the shareholder until a series of legal steps are being done like share subscribed, shares certificates issued or even share subscription are properly prepared.

Secondly,consider jurisdiction of your business is located:

In Canada, it doesn’t matter where you incorporate the business provincially or federally. Both are considered as Canadian corporation. Generally, a Canadian corporation that is incorporated provincially is good enough to  be a branch of foreign corporation. As compared to a provincial incorporation, a federal incorporation requires additional registrations to satisfy all provincial legal registration across Canada. Well, it has more compliance requirements.

Some restrictions are applied on director structure to form a federal corporation. The corporation’s director(s), minimum 25% of it  must be a Canadian citizen or permanent resident. Similarly, for Ontario, the rule of Canadian citizenship or permanent residency applies similarly. However, BC corporations do not have such restrictions.

Thirdly, information required to incorporate a business in Canada is very straight-forward.

• Name of the business, can be  a numbered or named incorporation.

• Select a Legal Ending inncluding Inc., Incorporated, Ltd., Limited, Corp., or Corporation.

• head office address

• legal names of directors (please provide as listed on photo ID, such as Driver’s Licence)

• address/es for directors

• share structure (generally one or two classes of shares)

Lastly, tax implications for corporations:

Corporations are commonly established when a business is operated in Canada. Tax implications from corporation perspective may be overwhelming but the major points are summarized as follows:

• Canadian corporations are required to file its corporate income tax return annually. The return must be filed in 6 months from the corporate fiscal year end. Income tax is payable in 2 months from the corporate fiscal year end. Corporations with zero taxable income or losses are not required to pay income tax, but they must file the corporate income tax return on time.

• From tax perspective,  when dealing with non-residents/related party outside Canada, you may give consideration to the issue of transfer pricing. Transfer pricing is  sometimes referred to as intercompany pricing, is the pricing of goods or services transferred between related parties. Canadian tax provisions require that prices charged in related party transactions conform to prices charged in comparable arm’s length transactions.
• The most common corporation type in Canada from tax perspective is called Canadian-controlled private corporation” (CCPC). The advantages of being a CCPC is to allow the corporation to  claim a federal small business tax credit on the first $500,000 of income from an active business carried on in Canada. As a result, the combined federal and provincial tax rate for a CCPC in Ontario is 15% in 2017(14% in 2018). A CCPC is generally defined to be a private Canadian corporation that is not controlled, directly or indirectly, by non-resident persons, public companies or any combination of those two. Other than the income tax compliance, other taxes should be on your radar as well.

• Scientific research and experimental development (SR&ED) generally involves engineering or design, operations research, computer programming, data collection, testing and psychological research. Such development expenditures incurred in a year are fully deductible for tax purpose. Furthermore, an investment tax credit is also available. The tax credit can be used as a direct reduction of a taxpayer’s tax liability. You can refer to my blog on SR&ED for more details:https://www.franklyca.com/4-myths-about-srd-claims/

• Payroll taxes where employers are required to withhold Canada Pension Plan (CPP) and Employment Insurance (EI) from wages to employees that are employed in Canada. Employers are also required to pay a matching contribution from its own funds.

• Workers compensation or WSIB is premiums that are required to be remitted by employers in every province in Canada.
• Sales taxes, generally called GST/HST, are generally imposed on the buyer and/or recipient of goods and services. The seller is responsible for collecting and remitting the tax to the CRA or to the provincial authority. Input tax credits are available to businesses that purchase goods for use in the provision of goods and services.

Now you have incorporated the business. Thinking of getting a loan, you can read my next article about CSBFL.