Glossary

Incorporation

Incorporation creates a distinct legal entity separate from its owners (shareholders).

The extended liability protection is one of the main reasons that businesses choose incorporation. Theoretically, no member of the company can be held personally liable for the debts, obligations, or acts of the company. A shareholder is only liable for the unpaid portion of shares owned.

Incorporation may be done provincially, giving a company the right to operate under its corporate name in a particular province. Federal incorporation gives a company the right to operate under its corporate name throughout Canada.

If you choose federal incorporation you need to go through the procedure of incorporation through Corporations Canada. (Corporations Canada administers the CBCA (Canada Business Corporations Act). There are offices in Vancouver, Ottawa, Montreal, and Toronto.) You can incorporate your business online, or get the forms you need to file as part of the incorporation process by automatic fax, Internet or mail.

If you choose provincial incorporation, you need to contact the appropriate Provincial Registrar. Some of these have Web sites which offer online provincial incorporation.

You'll find links to the incorporation forms needed in various provinces and step-by-step articles about incorporation in my Incorporation Canada library. There are also companies that offer incorporation services, both federal and provincial.

Sole Proprietorship

A sole proprietorship is a business owned and operated by one individual.

Legally, if you set up your business as a sole proprietorship, your business is considered to be an extension of yourself. Therefore, as a sole proprietor, you are personally responsible for all the liabilities and obligations your business incurs.

This means that if the business fails, any of your assets, including your personal assets, can be seized to discharge the liabilities owing.

On the positive side, a sole proprietorship is the easiest form of business to set up. If you operate your business under your own name, with no additions, you don't even need to register your business name to start operating as a sole proprietor.

It should also be noted that you don't have to keep the same form of business for the life of a business. Many small businesses start out as sole proprietorships, for example, and then become corporations later on.

Partnership

A General Partnership is defined as a business arrangement between two or more individuals who share the profits and liabilities of the business.

However, General Partnerships are not the only types of partnership arrangements that can be formed. In Canada, there are two other types of partnership:

Limited Partnership - A partnership consisting of one or more general partners, who have unlimited liability, and one or more limited partners, who have limited liability depending upon their contribution to the partnership. Often the limited partner contributes financially but is not otherwise involved in the business.

Limited Liability Partnership – In Canada, a limited liability partnership is often only available to groups of professionals, such as lawyers, accountants and doctors. These partnership agreements are governed by specific provincial legislation. For instance, currently in Ontario, only lawyers, chartered accountants and certified general accountants may form a Limited Liability Partnership.

Partnerships are not incorporated; each partner reports and pays income tax on his or her personal income tax return.

Self Employed

A situation in which an individual works for himself or herself instead of working for an employer that pays a salary or a wage. A self-employed individual earns their income through conducting profitable operations from a trade or business that they operate directly.

An individual who operates a business or profession as a sole proprietor, partner in a partnership, independent contractor, or consultant. He/she must report self-employment income on Schedule C of Form 1040.

Subcontractor

A subcontractor is an individual or in many cases a business that signs a contract to perform part or all of the obligations of another's contract.

A subcontractor is hired by a general contractor (or prime contractor, or main contractor) to perform a specific task as part of the overall project and is normally paid for services provided to the project by the originating general contractor. While the most common concept of a subcontractor is in building works and civil engineering, the range of opportunities for subcontractor is much wider and it is possible that the greatest number now operate in the information technology and information sectors of business.

The incentive to hire subcontractors is either to reduce costs or to mitigate project risks. In this way the general contractor receives the same or better service than the general contractor could have provided by itself, at lower overall risk. Many subcontractors do work for the same companies rather than different ones. This allows subcontractors to further specialize their skills.

GST Simplified Method

The Quick Method is a simplified accounting option available to help small businesses calculate their net tax for GST purposes. This method reduces paperwork and makes it easier to calculate GST remittances and file GST returns because it eliminates the need to report the actual GST paid on most purchases.

When you use the Quick Method, you still charge 5% GST on your taxable supplies of goods and services. However, to calculate the amount of GST to remit, you multiply the amount of your GST - included supplies for the reporting period by the Quick Method remittance rate or rates,  that apply in your situation.

The remittance rates are less than the 5% rates of tax that you charge. This means that you remit only a part of the tax that you collect, or that is collectible. Since you cannot claim input tax credits (ITCs) on most of your purchases when you use this method, the part of the tax that you keep accounts for the approximate value of the ITCs you would otherwise have claimed.

GST Quick Method: For details on GST Quick Method, Please check GST Simplified Method.

Vehicle Mileage

As a Canadian sole proprietor, you are NOT eligible for a per kilometre allowance. You must use the detailed method. This allowance is for employees only.

As a small business owner, you report your vehicle expenses on Form T2125 using the detailed method. This means you do have to keep all your receipts ... along with your log book.

When a vehicle is used partially for business purposes and partially for other purposes, the expenses relating to its use must be apportioned. Only those expenses relating to the business travel or commercial activity are considered eligible for a business deduction and for input tax credits on GST/HST. The proration in such cases is done based on the distances driven. To support a deduction or claim, the person must know and be able to demonstrate the distance travelled for business purposes and commercial activities.

Full Logbook

The best evidence to support the use of a vehicle is an accurate logbook of business travel maintained for the entire year, showing for each business trip, the destination, the reason for the trip and the distance covered.

Alternative records:  The fact that a viable business exists is usually a strong indicator that a person incurred vehicle expenses, because it is extremely difficult to carry on a business without doing at least some driving. Claims for a very low amount of business use do not require extensive records to demonstrate business travel. As the percentage of business use and the related expense claims increase, more documentation, as discussed below, is expected to be available.

For many persons, the books and records they already retain as part of their normal business operations may be indicative of the presence of and the extent of business driving. An appointment diary indicating what addresses were visited and why, or a log of service calls might be sufficient. Purchase or sales invoices may indicate that items were picked up or delivered by the taxpayer. Examples of other evidence that may be taken into consideration may include:

  • whether the person has another vehicle for personal travel,
  • the type of vehicle,
  • the nature of the business and the business travel likely required,
  • who else drives the vehicle (e.g., family),
  • how the vehicle is insured, and
  • indications of other personal travel.

CRA auditors will generally consider the usage of a vehicle in the context of the entire operation of that particular business. A proposal to disallow a portion of a claim for vehicle expenses would only occur where the claimed travel seems out of proportion in that overall context and is not supported by sufficient evidence as described here. However, it should be noted that individuals will be responsible for providing sufficient evidence to demonstrate the accuracy of their claims for business distances driven throughout the year.

Logbook for a sample period: The CRA would be prepared to afford considerable weight to a logbook maintained for a sample period as evidence of a full year's usage of a vehicle if it meets the following criteria.

  • The taxpayer has previously filled out and retained a logbook covering a full 12-month period that was typical for the business (the “base year”). The 12-month period is not required to be a calendar year.
  • A logbook for a sample period of at least one continuous three-month period in each subsequent year has been maintained (the “sample year period”).
  • The distances travelled and the business use of the vehicle during the three-month sample period is within 10 percentage points of the corresponding figures for the same three-month period in the base year (the “base year period”).

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