Corporations: An In-Depth Look
If you are planning to start a side hustle or even starting a business full time, this would be a great article for you to understand the various business structures that exist in Canada. Is there one that is better than the other for you? Find out below.
It’s important to consider the business structure as each has different tax implications, risk levels and regulatory requirements.
A business structure is also called a legal entity structure and you will have to select one before starting your side hustle or business.
There are 4 business structures in Canada but 3 of them are the most common:
Corporation
What is the third most common business structure? Corporation.
Let’s get started!
What is a Business Structure?
As mentioned above, a business structure is also known as a legal entity structure which in short means how the business is organized legally. You have to pick one before starting your business; it’s not optional. There are many considerations for a Corporation which we will go into more later.
How Many Businesses are Started Each Year?
According to the Key Small Business Statistics 2022 from the Government of Canada, in the 5 years between 2015 to 2019, approximately 101,324 businesses were created every year. They all had to pick a business structure to go with in order to legally form their business. You cannot operate your business if it’s not formed properly.
What is a Corporation?
According to CRA, ‘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’.
Types of Corporations
Here are five types of corporations that are recognized in Canada along with a brief summary of what qualifies under each type:
Canadian-Controlled Private Corporation (known as CCPCs; in summary, it is a private corporation, not listed on the stock exchange and controlled by a resident)
Other Private Corporation (not a public corporation and is a Canadian resident)
Public Corporation (listed on the stock exchange)
Corporation Controlled by a Public Corporation (Canadian subsidiary of public corporation)
Other Corporation (does not fall under the other categories)
Why a Corporation? 👍
Here are some reasons to go with a Corporation:
There is limited liability (the liability of shareholders are limited to the amount of their investment)
Continuous Existence (ownership can be easily transferred or passed down generations)
Lower tax rates
Easier access to capital
Why Not a Corporation? 👎
Here are some reasons to avoid a Corporation:
More complex and higher ongoing costs
Subject to more regulations (compared with Sole Proprietorship or Partnership)
More difficult to use losses (stays in the corporation and doesn’t get transferred to shareholders)
How to Start a Corporation?
If you like the pros and are okay with the cons of the different types of corporations, here is how to start one:
1) Create a business plan
o What kind of products or services you will offer?
o Develop mission/vision statements
o Who will you cater your products or services to?
o Prepare a budget so you know how much to set aside
o Prepare a forecast to see if your business venture would be profitable
o Here is a guide from BDC How to write a business plan | BDC.ca
2) Determine if you want to incorporate Federally or Provincially
o Here are the benefits of incorporating federally with Corporations Canada Choosing between federal incorporation and provincial/territorial incorporation - Canada.ca
o Here a guide on how to incorporate provincially Incorporating in a specific province or territory - Canada.ca
3) Determine a business name
o Search for existing business names to see if someone is already using it
o If you want to incorporate in Ontario, you can use Search the Registry (gov.on.ca)
o If you want to incorporate in Canada, you can use Search for a Federal Corporation
o If you’re planning to open a Professional Corporation, there are specific requirements on what the name could be; be sure to review with your regulatory body
4) Register the business name
o For federal incorporation, you will need to order a federal Nuans Name Search Report Nuans - Corporate name and trademark reports
o For provincial incorporation, you will need to order a provincial Nuans Name Search Report from a service provider Search Nuans members by region - Nuans
5) Register your corporation with Canada or with your province or territory
o For federal incorporation, you need to file Articles of Incorporation with Corporations Canada
o For provincial incorporation, you need to file Articles of Incorporation with the province/territory (for example, Ontario would be filed with Service Ontario) Articles of Incorporation - Business Corporations Act - Forms - Central Forms Repository (CFR) (gov.on.ca)
6) File an Initial Return (if incorporated provincially)
o Form 1 – Initial Return (Ontario)
7) Create a Corporate Minute Book
o If you use a lawyer, they will create this and maintain it for you
o Include the Articles of Incorporation and Form 1 Initial Return
o Corporate By-Laws (rules that governs the operations of the corporation)
o Directors’ and Officers’ Register
o Shareholders’ Register
o Resolutions
o Share Certificate
o Shareholder Agreement (if more than one shareholder)
8) Open a business bank account
o Since a corporation is a separate legal entity, you need to keep your business finances separate from your personal bank account
9) Check if you need any licenses or permits to run your business
o Each province or city may have different requirements
o Here is a link to BizPaL - Home Page (bizpal-perle.ca) outlining what you may need
10) Determine if you need to register for an HST account
o You can choose to register for it now or wait until you reach the requirement to register
o ie. Are you planning to have more than $30k in gross sales per year?
o Here is a link to CRA outlining when you need to register for HST: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/when-register-charge.html
11) Determine if you need to register for a WSIB account
o This is only applicable if you have or planning to have employees
o Most businesses are not exempt from WSIB
o For example, under Ontario, Do you need to register with us? | WSIB
12) Determine if you need to register for an EHT account
o This is only applicable if you have or planning to have employees
o If you’re just starting out, you most likely under the exemption
o For example, under Ontario, Employer Health Tax (EHT) | ontario.ca
13) Create a website and branding
o More and more businesses rely on a website for marketing purposes
o Check out DIY websites like Squarespace, Wix or WordPress
14) Get financing
o If your business requires financing to get up and running, your financial institution may have some options
15) Get insurance
o Inquire with an insurance agent or broker on the types and amounts of coverage that you need to protect your business
o For a Professional Corporation, regulatory bodies usually require professional liability insurance
16) Purchase an accounting software to track your revenue and expenses
o If you’re just starting your business, you can probably just use Excel
o As your business grows, it may be useful to purchase an accounting software like QuickBooks Online
Tax Considerations
Now that we went through how to start a corporation, it’s important to think about the tax considerations too.
Here are some areas that you need to consider:
Annual Taxes
The details of your business needs to be filed on the T2 Corporate Income Tax Return (even if there is no activity)
The T2 Income Tax Return is due latest 6 months after the end of the fiscal year (ie. Dec 31st year end means it’s due latest Jun 30th of the following year)
Any income taxes owing needs to be paid 3 months after the end of the fiscal year (if your corporation is a CCPC) or 2 months after the end of the fiscal year (if your corporation is not a CCPC)
You can pick your fiscal year (it doesn’t have to be calendar year)
If you paid dividends, you will need to issue T5 Statement of Investment Income to your shareholders and T5 Summary to CRA by February 28th of the following year
The first $500k of Active Business Income is taxed at the low tax rate
If you earn $50k or more in passive income, the $500k business limit will be reduced
The $500k business limit is also shared among Associated Corporations
GST/HST
You will have to start charging GST/HST to your customers and you can claim ITCs for the purchases you made
There are ongoing filings required depending on your reporting frequency
Any amounts owing on the GST/HST filings have to be paid before a certain time
Reporting frequency (based on fiscal year):
o Monthly (filings and payment are due end of following month)
o Quarterly (filings and payment are due end of the following month after the quarter)
o Annual (filings and payment are due by Mar 31st of the following year)
Payroll
On every employee pay stub, you are required to deduct Source Deductions (CPP, EI and Income Tax) and remit those deductions to CRA (along with employer’s portion of CPP and EI)
You must provide T4 and/or T4a to your employees by February 28th of the following year
If you have a WSIB or EHT account, there are filings and payments required at certain periods
Payroll burdens are tax deductible
If your employees experience an interruption of earnings, you are required to file a Record of Employment with Service Canada
Other
You must keep all receipts and income documentation for a period of 6 years plus current year (in case CRA asks for it)
You may need to register for other CRA program accounts depending on your business operations
You can pay yourself a Salary or Dividends
You can pay your family members a salary and it will be tax deductible if the salary is reasonable
You are required to file an Annual Return every year as it’s no longer part of the T2 and it depends whether you incorporated federally (Annual return – Business corporations (canada.ca)) or provincially (for example, in Ontario you can refer to Filing an Annual Return)
Future Considerations
Starting a corporation is a good idea because of the attractive tax rates and tax planning that’s available. Compared to Sole Proprietorship or Partnership, this one is the most costly to set up, most complex and subject to many ongoing regulatory requirements.
Here are some future considerations for corporations:
#1 – Selling your Corporation
If you decide to sell your corporation, you can sell the assets or you can sell the shares. Selling assets means that you still own the corporation and are still liable for the liabilities after the sale. Your corporation would be subject to capital gains and once you distribute the remaining funds, you will be subject to personal tax.
Selling the shares means that you will give up all control of the corporation (effectively transferring the corporation to the purchaser). You may be eligible to claim the Lifetime Capital Gains Exemptions which allows a tax-free capital gain up to certain threshold which usually gets indexed to inflation.
#2 – Acquiring another Corporation
You may decide to acquire another corporation that can complement your current corporation’s activities to realize synergies between them. You can choose to put that corporation into your own name, as a parent/subsidiary relationship or amalgamate them together.
If it is a subsidiary, you can transfer dividend payments to the parent company on a tax-free basis. If the products and services in one of the corporations are inputs for the other or one corporation is paying expenses on behalf of another, then there is a need to track related party transactions.
For an amalgamation, this means that two or more corporations are combined together and operate as one going forward.
It’s important to seek legal and accounting advice to ensure everything is done correctly.
Your Turn
Do you have a better understanding of why you would want to start a corporation or reasons to avoid this business structure? This blog went into detail of how to start a corporation and an in-depth look into some of the tax and future considerations you should think about.
If you’re not sure, make sure to contact us to find out the optimal business structure for you!
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At JTL CPA, we are Ontario’s virtual accounting firm. Our goal is to automate your accounting and bookkeeping processes in a way that increases financial visibility. Pair that with our value-added approach and tailored advisory solutions gives you the ability to make sound decisions from good data. Check out our website here: https://www.jtlaccounting.com.
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