Basic Regulations for Getting Started

Welcome to the Canada Business audio workshop. This 6 part series will help you with basics of starting and growing your business and will cover some of the most challenging aspects of business ownership.

In this session we will discuss basic regulations for getting started.

Basic Regulations for Getting Started

This chapter is for individuals who are ready to start operation and want instruction on the regulations that affect most small business start ups. You might want to start by deciding if you want to operate as a proprietor, a partnership or a corporation.

You will want to know what taxes might affect your business and if you are going to be employing people in your business, then there are a number of regulations that may affect you. Also included is a handy start up checklist indicating regulations that will likely affect your business.

This chapter discusses the basic regulations that are common to most start ups and does not encompass permits, licences or regulations that may be specific to the industry or type of business you plan to work in. For further information on regulations specific to your business, contact your local Canada Business.

Proprietorship, Partnership or Incorporation?

• Advantages and Disadvantages of Proprietorship
• Advantages and Disadvantages of Partnership
• Advantages and Disadvantages of Incorporating
• Registering a Proprietorship or Partnership
• Registering a Corporation
• Incorporating a Company in your Province
• Aboriginals and Forms of Business

From a legal point of view, there are three common types of businesses: sole proprietorship, partnership and corporation. Each has different and important implications for liability, taxation and succession. A lawyer or accountant can advise you on which is suited to your needs, and undertake the necessary formalities.

Advantages and Disadvantages of Proprietorship

This is the simplest way to set up a business. A sole proprietor is fully responsible for all debts and obligations related to his or her business. A creditor with a claim against a sole proprietor would normally have a right against all of his or her assets, whether business or personal. This is known as unlimited liability.

In a proprietorship, one person performs all the functions required for the successful operation of the business. The proprietor secures the capital, establishes and operates the business, assumes all risks, accepts all profits and losses, and pays all taxes. The proprietor is said to be self-employed.

Advantages:

• Low start-up costs
• Greatest freedom from regulation
• Owner in direct control of decision making
• Minimal working capital required
• Tax advantages to owner
• All profits to owner

Disadvantages:

• Unlimited liability
• Lack of continuity in business organization in absence of owner
• Difficulty in raising capital

Advantages and Disadvantages of Partnership

A partnership is an agreement in which two or more persons combine their resources in a business with a view to making a profit. In order to establish the terms of the partnership and to protect partners in the event of a disagreement or dissolution of a partnership, a partnership agreement should be drawn up. Standard form partnership agreements can also be purchased for about $5.00 at stationary stores. Partners share in the profits according to the terms of the agreement.

In a General Partnership, two or more owners share the management of a business, and each is personally liable for all the debts and obligations of the business. This means that each partner is responsible for, and must assume the consequences of, the actions of the other partner(s).

A second type of partnership is a Limited Partnership which involves limited partners who combine only capital. They are not involved in managing the business and cannot be liable for more than the amount of capital they have contributed. This is known as limited liability.

A limited partnership also involves general partners, who are involved in management. They are fully liable for the debts and obligations of the business, but may be entitled to a greater share of the profits.

Advantages:

• Ease of formation
• Low start-up costs
• Additional sources of investment capital
• Possible tax advantages
• Limited regulation
• Broader management base

Disadvantages:

• Unlimited liability
• Divided authority
• Difficulty in raising additional capital
• Hard to find suitable partners
• Possible development of conflict between partners
• Partners can legally bind each other without prior approval
• Lack of continuity

Advantages and Disadvantages of Incorporating

A corporation, also known as a Limited Company, is a legal entity which is separate and distinct from its members (shareholders). Each shareholder has limited liability. A creditor with a claim against the assets of the company would normally have no rights against its shareholders, although in certain circumstances shareholders may be held liable. It is recommended that legal advice be sought. This type of business can be incorporated at either the federal or provincial level.

Ownership interests in a corporation are usually easily changed. Shares may be transferred without affecting the corporations existence or continued operation.

The following characteristics distinguish it from a partnership or proprietorship:

Limited liability - normally no member can be held personally liable for the debts, obligations or acts of the corporation beyond the amount of share capital the members has subscribed; and

Perpetual succession - because the corporation is a separate legal entity, its existence does not depend on the continued membership of any of its members.

Advantages:

• Limited liability
• Possible tax advantage (if you qualify for a small business tax rate)
• Specialized management
• Ownership is transferable
• Continuous existence
• Separate legal entity
• Easier to raise capital

Disadvantages:

• Closely regulated
• Most expensive form to organize
• Charter restrictions
• Extensive record keeping necessary
• Double taxation of dividends
• Shareholders may be held legally responsible in certain circumstances
• Personal guarantees undermine limited liability advantage

Registering a Proprietorship or Partnership

Proprietorships and Partnerships are regulated by the provincial government.

Registering a Corporation

You have the option to incorporate at a provincial level or at a federal level. If a company intends to carry on its activities solely in one province, provincial incorporation may be preferable. If the company wishes to expand its activities outside of its provincial jurisdiction at a later date, it must obtain an extra-provincial license from every other province in which it wishes to open an office or obtain a presence.

Under the Canada Business Corporations Act, any individual or corporation may receive a certificate of incorporation for any legal purpose with the exception of operating such institutions as banks, insurance companies, and trust and loan companies. In several provinces, a federally incorporated company will still have to obtain extra provincial registration to operate.

Incorporating a Company in your Province

Incorporating can be a very involved process and it is recommended that you seek the advice and services of a lawyer and/or an accountant.

Aboriginals and Forms of Business

Aboriginal businesses may receive tax exemptions for certain forms of business. The form of business you choose can have a significant impact on the way you are protected under the law and the way you are affected by income tax rules and regulations. Therefore, it is necessary that Aboriginals understand the advantages to starting one form of business over another.

For more information on Registering a Proprietorship or Partnership, Registering a Corporation, Incorporating a company in your Province or Aboriginals and Forms of Business, please contact the Canada Business Service Centre nearest you by calling 1-888-576-4444.

Taxation (Provincial and Federal)

• Provincial Sales Tax
• Harmonized Sales Tax - HST
• Income Tax (Federal)
• Expense Deductions
• Goods and Services Tax - GST
• Excise Tax
• Business Number
• Corporation Capital Tax
• Aboriginal Business and Taxes

Provincial Sales Tax

For information on the Provincial Sales Tax in your province, contact the Canada Business service centre nearest you at 1-888-576-4444.

Harmonized Sales Tax - HST

The governments of Canada, Nova Scotia, New Brunswick, and Newfoundland and Labrador harmonize provincial retail sales taxes (PST) in these provinces with the Goods and Services Tax (GST). This single value-added tax is called the Harmonized Sales Tax (HST).

Income Tax (Federal)

If you conduct business as a proprietorship or a partnership, report your share of gross and net profits (or losses) for the business' fiscal period on your individual tax return (T1).

For an incorporated company, file a corporation tax return (T2) within six months of the end of the corporation's fiscal period.

Expense Deductions

As a rule, you can deduct any reasonable expense you incur to earn business income. The expenses you can deduct include any goods and services tax (GST) you incur on these expenses unless you claim an input tax credit on these expenses. Therefore, enter only the business portion of expenses on the form. In addition, you cannot claim expenses you incur to buy capital property.

Deductions might include:

• advertising
• bad debts
• delivery, freight and express costs
• fuel costs
• insurance
• interest on money borrowed to run your business
• maintenance and repairs
• management and administration fees
• meals and entertainment (50% of the amount you incur, or an amount that is reasonable in the circumstances, whichever is less)
• motor vehicle expenses (including license and registration fees, fuel costs, insurance,interest, maintenance and repairs and leasing costs)
• telephone and utilities
• disability related modifications, devices and equipment
• expenses for disability-specific computer software and hardware attachments
• computer leasing costs
• other leasing costs
• small tools (i.e. less than $200 cost per tool)
• convention expenses (maximum two conventions a year)
• capital cost allowance
• allowance on eligible capital property (e.g. goodwill, franchise)
• business use of home expenses.

Goods and Services Tax - GST

Canada Revenue Agency administers the Excise Tax Act - Goods and Services Tax and the Excise Act - Excise Tax and Duties.

Excise Tax

You must be licensed for Excise Tax if you are manufacturing goods subject to Excise Tax and your sales exceed $50,000.00 in a calendar year. Some examples of goods subject to Excise Tax are clocks, watches, jewellery, gasoline and tobacco.

Business Number

For information, contact the Canada Business Service Centre nearest you at 1-888-576-4444.

For a list of Canada Revenue Agency's Business Window offices, contact the Canada Business Service Centre nearest you at 1-888-576-4444.

Through these windows you will also be able to get one-stop service including:

• Registration for Canada Revenue Agency's four major business accounts
• information about any one of these accounts, including recent payments and account balances.

The benefits of the BN are less paperwork, more efficiency and reduced costs for both business and government.

Corporation Capital Tax

For information on Corporation Capital Tax in your province, contact the Canada Business Service Centre nearest you at 1-888-576-4444.

For information in Ontario, contact the Corporations Tax Branch, Ministry of Finance at 1-800-263-7965.

For information in New Brunswick, contact the Revenue Division, Department of Finance at (506) 453-2138.

Aboriginal Business and Taxes

Tax exemptions for aboriginal people date back to 1876, when the federal Indian Act was established. However, only Aboriginal people who are registered under this Act are exempt from tax - and then only under specific conditions. Some of the taxes that an Aboriginal business may be exempt from are the Goods and Services Tax (GST) or the Harmonized Sales Tax, Provincial Sales Tax (PST) and Income Tax. For further information on this subject, please visit the Canada Revenue Agency Web site.

Becoming an Employer

• Payroll Deductions Requirements
• Employment Standards
• Workers' Compensation and Workplace Safety

The following information is intended to act as general guidelines. The general responsibilities of employers, as well as the legislation employers should be familiar with, are included. However, it is important to note that this is merely a guideline.

Payroll Deductions Requirements

You are generally considered to be an employer if:

• you pay a salary, wages (including advances), bonuses, vacation pay, or tips to your employees
• you provide certain benefits such as board and lodging to your employees.

An employer-employee relationship exists if you are in a position to control and direct the person or people who perform services. Although a written contract might expressly indicate that an individual is self-employed, Canada Revenue Agency might not necessarily consider the individual as such. You must examine the written contract and the working conditions to determine if the individual is self-employed.

If you cannot determine whether a person is an employee, you can obtain a ruling from the Trust Accounts Division of Canada Revenue Agency, or Specific Regulations - Québec.

What are your responsibilities as an Employer?

As an employer, you have to:

• ensure that you have a Business Number which identifies the four major Canada Revenue Agency business accounts:
  • Income Tax Returns - the T2 Corporate Income Tax Return and the T2 Short Return
  • Importer/Exporter Account Number
  • Trust Accounts Division
  • Goods and Services Tax and Harmonized Sales Tax - GST/HST
• deduct income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums from amounts you pay to your employees
• send in these amounts along with your share of CPP contributions and EI premiums that you have to pay throughout the year on your employees' behalf
• get a social insurance number from each employee
• report all these amounts on an information return by the end of February of the following calendar year.

NOTE: As an employer or payer, you hold payroll deductions in trust for the Receiver General. Therefore, you have to keep these amounts separate from the operating funds of your business. They must not be part of an estate in liquidation, assignment, receivership or bankruptcy.

Employment Standards

For information on employment standards for industries regulated by either the federal or provincial government, contact the Canada Business Service Centre nearest you at 1-888-576-4444.

Canadian Human Rights Act

This Act forbids discrimination in a number of employment-related areas including employment advertisements, hiring practices and wages. Employers are prohibited from discriminating against employees or prospective employees on the grounds of race, colour, ancestry, place of origin, political belief, religion, marital status, family status, physical or mental disability, sex, sexual orientation, age, or a prior unrelated conviction of such person.

Worker's Compensation and Workplace Safety

For information on workers' compensation and workplace safety for industries regulated by either the federal or provincial government, contact your local workers compensation board.

Start up Checklist

• Registering your Business
• Obtaining a Business Licence
• Land Use and Zoning
• Provincial Sales Tax
• Goods and Services Tax (GST)
• Harmonized Sales Tax
• Excise Tax
• Business Number
• Payroll Deductions
• Workers' Compensation and Safety
• Employment Standards
• Business Records

The above are general requirements and guidelines affecting most businesses. Please note, additional regulations from municipal, provincial and/or federal government may apply to your particular business. For this information, contact your local Canada Business.

Obtaining a Business Licence

Municipalities normally require that your business premises be licensed to conduct business within its municipal boundaries in accordance with the bylaws. In some instances, persons may be required to obtain licences in municipalities in which they do not maintain premises but do carry on business. For example, persons involved in direct sales to the consumer should contact each community in which they are doing business.

If your business is located in an incorporated municipality (city, town, village or district), obtain a business licence from the municipal business licence office. Refer to the blue pages of your telephone book for your local municipal hall.

Land Use and Zoning

If your business is located in a municipality, check with municipal authorities to ensure conformity with zoning and building regulations. If your business is located in an unincorporated area, check with the Regional District to ensure conformity with land use designation.

Business Records

If you are operating a business or have a self-employment income, set up an orderly record and accounting system as required under the appropriate laws. All records, including both paper documents and electronically stored documents, must be kept in Canada or made available in Canada. You have to keep your records for six years from the end of the last taxation year to which they apply. It is recommended that you contact the nearest Revenue Canada office for relevant forms, information on expense deductions, interpretation bulletins and income tax return forms. Purchasing the services of a qualified accountant is recommended.

This concludes session 5 of the Canada Business audio workshop series, for further information on anything discussed in this episode please contact the Canada Business service centre near you by calling 1-888-576-4444.

©2007 Canada Business