Starting a Small Business in Canada? Here’s Everything You Need to Know

 Understanding the different business types

Canada has different business designations and each has specific tax filing requirements and dates. There are three common business types:

• Sole proprietorship

• Partnership

• Corporation

A sole proprietorship is a common business designation choice for solopreneurs, gig workers, self-employed professionals, and small-business owners who run their operations from home. Sole proprietors file business taxes at the same time they file personal taxes and enter the income details from their business on lines 13500 through 14300 of the income tax return.

A partnership consists of one or more people owning a business together. The income generated from the partnership is divided among each owner and reported in the same way sole proprietor income is.

Corporations are legal entities entirely separate from their owners. Owners are called “shareholders,” and there can be one or more owners depending on how the corporation is structured. Corporations must file a T2 income tax return no later than 6 months after the end of each tax year.

Step 1: Choose a business designation

The way you choose to legally structure your business is both a personal and professional decision. Some new business owners want to keep everything as simple as possible, so they choose to launch as a sole proprietorship. Others intend to grow the business substantially, and potentially seek funding or sell the business at some point in the future, so they incorporate from the start.

Corporations may also qualify for tax breaks that aren’t available to sole proprietors. And since corporate assets are separate from shareholder assets, incorporating can protect against personal liability risks.

Step 2: Get a business number

If you incorporate your business in Canada, you will automatically be issued a business number (BN). This is a unique 9-digit number that identifies your company to the Canada Revenue Agency (CRA).

If you choose a sole proprietorship or partnership designation for your business, you will also be issued a BN—but only if you register for GST/HST (see below), set up payroll, or if your business has employees.

You can obtain a business number directly through the CRA, as well.

Step 3: Register for a GST/HST account

If your company expects to sell less than $30,000 of nontaxable goods or services annually, it is not required to have a Goods and Services/Harmonized Sales Tax (GST/HST) account but can have one if desired.

For example, if your company sells taxable goods and services—say you own a gift shop or a grocery store, or you provide handyman services—it’s required to collect, report, and remit GST/HST taxes monthly, quarterly, or annually. However, if you run a service business, such as consulting or dentistry, then it may not be required.

Even when registration is not required because you’re a small supplier, it can be beneficial to your business because it allows you to qualify for investment tax credits for activities such as purchasing equipment when launching your business.

Small businesses with less than $1.5B in annual revenue are required to report annually but can elect to report and remit more often.

Step 4: Determine your payroll needs

If your new business employs others, it will need to register for a payroll account with the CRA. Employers are individuals or businesses that pay wages, tips, or other forms of salaries and taxable benefits.

When you hire employees, you’re required to register for a payroll account and withhold deductions from the employees’ paycheques. Those withholdings are then sent (remitted) to the CRA on the 15th of each month. You’ll also need to provide each employee with a T4 slip and file annual T4 slips with the CRA.

Step 5: Create separate business bank accounts

The number-one tip for new business owners is to keep business and personal financial accounts separate.

Have a separate bank account and credit card for business income and expenses, and use it only for business. If you use your personal account for business expenses, or vice versa, you can complicate the tax-filing process.

Step 6: File your taxes right

Filing small-business taxes is primarily a matter of keeping track of your expenses and staying on top of key filing deadlines.

As a sole proprietorship or partnership, you’ll report your business income and expense details within your personal tax return using Form T2125. If you elected to incorporate your new business, those income tax forms are due June 15 of each filing year. If you miss this deadline, you may incur penalties. Any balance owing is due by April 30 to avoid accruing interest.

In addition to those key dates, remain aware of your GST/HST and payroll obligations.

You must deduct payroll taxes from each employee paycheque and remit those payments to your CRA payroll account the 15th of each month.

GST/HST remittance is due annually until your business exceeds $1.5M in revenue; quarterly up to $6M; and monthly when your annual revenue exceeds $6M.

Since accounting for small businesses can range from simple to complicated, you may be thinking about using an accountant. An accountant is not necessarily needed, even if you have multiple program accounts, such as GST/HST and payroll. TurboTax experts are excellent resources for new Canadian business owners and can simplify the process for you.