When the Entrepreneur and Tax Man Meet.

• Author: Butler, Caitlin
• Position: Feature: Low for Entrepreneurs

Starting a business can be exciting, but also incredibly nerve-wracking. While tax considerations are often a low priority, some commonly overlooked issues can cause significant headaches. Below we discuss some key general considerations. Specific advice from a tax professional is prudent.

Business or Personal Venture?

Determining if and when a business has commenced can be a confusing matter. In some cases, it may be obvious. In others, not so much. To determine whether one is carrying on a business, the Canada Revenue Agency ("CRA") looks to a number of factors, including: the individual's intended course of action, the historical performance of the undertaking, the potential for future profits, the education and training of the individual, and business risk management/minimization.

If the operation is considered a business, income or loss must be reported on the tax return. CRA often questions start-up losses. A written business plan showing how the operation will generate future income can be helpful.

Business Structure

The next step is to determine the legal form of the business. Typically, one of three structures are selected:

1. A Sole Proprietorship is the simplest structure. The owner just starts running the business and reports all earnings and expenses on their personal tax return. The business does not have a separate legal status and the owner assumes all risks personally.

2. A Partnership is an association or relationship between two or more persons who join together to carry on a business in common, with a view to profit. Each partner contributes money, labour, skills or property, and in turn, is entitled to their share of the profit or loss. Certain partnerships are subject to tax filing requirements. While most partnerships are usually governed by a written agreement, they can be formed by a simple verbal agreement. Some partnerships, with proper structures and legal filings, may limit the partners' business risk to contributions to the partnership.

3. A Corporation is a separate legal entity which is established by filing articles of incorporation with the appropriate jurisdiction. The owner transfers money or property into the corporation in exchange for shares. While shareholders enjoy significant protection from corporate debts and risks, its directors could still be liable for some corporate debts such as GST/HST, and payroll withholdings (including El and CPP).

The Canadian tax system is structured so that, generally...