Corporations

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.

Advantages

  • A corporation is a separate taxpayer and is solely liable, with certain exceptions, for its business and tax obligations, including income taxes, GST and other taxes.
  • A Canadian controlled private corporation (which is generally a private corporation controlled by a Canadian resident) pays a lower rate of Canadian federal and provincial income tax. At the present time, the combined rate of the federal and provincial income tax on the first $500,000 of active business income eligible for the small business deduction may be as low as 15.5 percent. For more information about incentives for small business, see Small Business Corporations [small business corporations page].

Disadvantages

  • The administrative and compliance costs can be high. For example, a corporation has to file annual corporate and tax returns. Corporate tax returns have to be submitted even if the corporation does not generate profits or owe any taxes.
  • Business and capital losses incurred by the corporation cannot be written off by its shareholders.
  • The transfer of profits from a corporation (other than a small business corporation) to an individual shareholder may result in double-taxation.

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.