In Ontario, a business corporation can be established under federal law (Canada Business Corporations Act) or provincial laws (e.g., under Ontario Business Corporations Act).
In certain circumstances, a foreign corporation may also carry on business in Canada.
For Canadian tax purposes, a corporation is a separate person. Accordingly, a corporation will “own” the business and will be solely responsible for income and other taxes. A shareholder will be able to benefit from the corporation’s profits only when the corporation distributes funds in the form of dividends or shareholder loans.
Generally, business can be carried on through a corporation where it has become profitable or where business owners want to minimize potential liabilities, including personal liability for future business losses.
An existing business, operated by a sole proprietor or partnership, and its assets can be transferred to a corporation tax-free through a rollover. The Corporation would then continue operating the business as its sole owner.
Note on Personal Liability of Shareholders, Directors, and Officers:
Generally, a corporation is a separate person liable for its debts and obligations. As such, a shareholder (an individual or another corporation) of the corporation is generally not personally responsible for the debts and liabilities incurred by the corporation beyond the amount invested in the corporation’s capital. For example, if an individual invested $1,000 in the equity of a corporation and the corporation is now liable to pay $10,000 in overdue tax and penalties to the Canadian tax authorities, the Canada Revenue Agency generally may not pursue the shareholder’s personal assets to recover the funds.
However, protection afforded to a shareholder under common law is not absolute. A prudent shareholder actively participating in the management of a corporation (as a director or officer) should enquire about the extent of potential personal liabilities, arising from the common law doctrine of “piercing the corporate veil” and from various Canadian corporate and tax laws. For example, a director of a corporation may be personally liable for some debts of the corporation (such as GST/HST and payroll taxes) or an employee/shareholder actively managing the corporation can be found to be a de facto director. As such we caution that as a condition of employment or directorship, a director or officer must request prior to accepting the position that such corporation purchase a 3rd party liability insurance to cover the costs and expenses incurred as a result of the possible aforementioned liabilities.
For further information on this specific area of practice, please contact our specialized and dedicated tax lawyers:
TaxChambers LLP is collaborating with Andersen Global® in Canada.