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Types of Business Ownership

There are three major types of business ownership structures in Canada— each with different income tax requirements:

  • corporations
  • sole proprietorships
  • partnerships

Corporations

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:

  1. Canadian controlled private corporation (CCPC)
  2. Other private corporation
  3. Public corporation
  4. A corporation controlled by a public corporation
  5. 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.

Sole Proprietorships

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.

Partnerships

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.

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