TAXATION AND BUSINESS START-UP IN CANADA

Most entrepreneurs don’t have an in-depth understanding of tax laws when setting up a business. So, they will likely hire an accountant to ensure everything is set up correctly from the beginning. 82.75% of our clients are small business corporations and we have the tools to help you!

Taxation of Various Business Structures
It’s good to know about different tax treatments when selecting a business structure. Let’s look at some of the differences:

Sole Proprietor
A sole proprietor is treated the same as an individual running a business and must include income from all property and business for the year, which means all the profit made from them, not including capital gains or losses by transferring property. According to the courts, the profit from a property or business is calculated by deducting the expenditures from the profits. With a sole proprietor, tax is levied at graduated rates, unlike with a corporation. Sole proprietorships are often the way individuals start home-based businesses, converting them to one of the other legal structures when the business shows signs of succeeding.

Partnership
Income at a partnership level must be determined as though the partnership was one person, meaning it is computed from different sources plus any net capital and non-capital loss, firm and restricted firm loss are factored in. Each partner must recognize their share of the income, but the partnership doesn’t have to detail the allocation between partners. Still, the partnership must show that each partner in the company is correctly reporting their share of income. It is important to realize that a partnership, like a marriage, should not be entered into lightly. Partners have wide apparent authority to personally bind the other partners

Co-Ownership or Joint Venture
Co-ownership doesn’t make the owners equal partners, but it does differ from a partnership. A corporate joint venture is like a corporation because most rules are equally applicable.

Corporation
A corporation is a distinct entity from the shareholders. Subsequently, there are two stages of taxation, however, one of which is at the corporate level while the second is at the shareholder level. The type of corporation, income source, distribution timing to shareholders, and the relationship between shareholders and corporation all determine the tax.

Planning Business Start-Up Taxes
It’s essential to figure out whether losses or profits will be projected in the start-up phase of the new business. If losses are expected, then it’s likely best not to choose a corporation as your preferred business structure. Any losses will remain within the corporation, which means the business owners can’t access them. Such losses aren’t going to be able to offset other income sources by the entrepreneur.

A partnership or proprietorship would be preferable in such circumstances because the entrepreneur can’t directly apply losses.

The entrepreneur in this scenario has personal liability for all debts. Using a corporation can protect some debts if acting as a trustee with a written agreement in place. The courts might or might not affix liability directly to the owner, but it is still a possible barrier. A bare trust corporation is viewed as a tax conduit, and any loss or income is seen as being in the beneficiary’s direct hands.

If profits are expected, the entrepreneur’s accountant should undertake an analysis of the potential tax burden of personally earned income via a corporation.

Remember active business income up to $200,000 is subject to a low tax rate, so any income over this should be paid via bonus or salary to reduce the corporate taxable incomings.

The beginning taxation stage in a corporation is less than the upper marginal tax rate for individuals. So, if the funds aren’t required for personal consumption by the entrepreneur, a tax deferral may be applied until dividends are due to be paid to shareholders.

Acquiring a Business: What It Means for Tax Planning
If you’re deciding between starting a brand-new business and buying an existing one, you are sure to wonder whether shares or assets are going to be acquired.

Now the general rule is that vendors wish to sell shares and purchasers want to acquire assets, but the applicable tax rules and rule changes must be looked at in-depth before going ahead with a decision. It’s in your best interests to hire an experienced accountant at Tax Partners to ensure everything is done correctly and you’re spared any unpleasant surprises down the line.

How Does Corporation Tax Affect Your Business?
Corporations tax is paid on profits/net income, meaning if you pay it, you have less cash left over in your business for reinvestment. So, it’s sensible to minimize the amount of corporation tax you pay, and you can do this ethically and legally. Hiring Tax Partners can ensure that we maximize your profits while staying within the law.

Corporate Tax Planning Limitations
How much tax you pay can be minimized only in specific ways, and the rules change regularly.

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The content of this blog/article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Our firm does offer a FREE initial consultation (30 minutes).