There are three major types of business ownership structures in Canada— each with different income tax requirements:
- sole proprietorships
Corporations are viewed as separate legal entities in the eyes of the law. A corporation is an entity that is registered/incorporated (provincially or federally) and has owners (shareholders) and a board of directors. Corporations are required to file their own corporate tax returns separate from their owners.
There are five types of corporations:
- Canadian controlled private corporation (CCPC)
- Other private corporation
- Public corporation
- A corporation controlled by a public corporation
- Other: such as general insurers and Crown corporations
The majority of businesses in Canada are CCPCs which, in some cases, have more favourable tax treatment. See corporate tax rates here.
A sole proprietorship is an unincorporated business. Business or professional income from a sole proprietorship is reported on the proprietor’s T1 personal tax return (see below) as ‘self-employment’ income.
A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business. Each partner contributes money, labour, property, or skills to the partnership. In return, each partner is entitled to a share of the profits or losses in the business. The business profits (or losses) are usually divided among the partners based on the partnership agreement.
Unlike a corporation or an individual, a partnership is not regarded as a legal person. A partnership may be required to file a partnership return to allocate its income amongst its partners. However, this partnership return is not a tax return and does not generate taxes payable by the partnership, but rather by its partners. This is why a partnership is sometimes referred to as a ‘flow-through’ entity.
For more information, see the CRA’s discussion of sole proprietors and partnerships.