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Canada: How to set-up as a Sole Proprietor (Self-Employment)

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July 28, 2020
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Canada is not only the second-largest country in the world, but it is also a great place to start a business. According to the World Bank's Doing Business 2018 ranking, Canada is the third-best country in the world in which to start a business. Indeed, for instance, Canada has one of the lowest corporate tax rates in the world (15% in 2019). Furthermore, the economic growth is stable and the country has a skilled workforce.

Self-employment is a status that more and more people are choosing when they come to live in Canada. This article will help you through the steps to become a self-employed professional in Canada.

The general procedure for setting up a business such as the sole proprietorship is the same no matter where you live in Canada. However, there are different details in each province and territory, so keep an eye on that.

Disclaimer: Please bear in mind that this article doesn't substitute legal advice. Information in this article was collected from Canadian government websites and other online resources.

Sole proprietorship

A sole proprietorship is a simple legal structure that allows an individual to set up a business on their own. The business is operated by one person, often called a "self-employed worker" or an "independent contractor" who works alone; therefore the business is not incorporated

With this type of business structure, the business owner doesn't have a separate legal status from their business. The sole proprietor assumes all the risks of the business and has sole responsibility for making decisions, claiming all potential losses, and receiving all generated profits. The sole proprietor needs also to reports their business income on their income tax and benefit return.

Business registration

Generally, the first step for Canadian business registration is to register the business name in the Register of Businesses, unless you want to operate under your own name. Also, business owners need to register as sole proprietors within the provinces and territories where they want to run their operations (see the paragraph below), since the registration of trade names is a provincial/territorial responsibility. You need to go to the registry of the jurisdiction(s) where you plan to do business. You should check the official website of your provincial or territorial government for specific information and requirements.

Here is an overview of registration procedures in each province:

There is an exception to the principle of registering the business name. Indeed, if sole proprietors use their full name with no addition to run their business activities, there is no obligation to register the business name and to follow the rules of registering such as filling an initial declaration, updating declaration, etc. However, be careful not to use additions to legal names such as "Inc.", "Co.", "and Partners/Sons", as that is considered as an actual business name!

Furthermore, sole proprietorships are governed under the provincial and territorial legislation in Canada, so the procedure slightly differs depending on the provinces or territories. For instance, in Newfoundland and Labrador you do not have to register the name of sole proprietorships or partnerships at all. Taxes can also vary from region to region. Nevertheless, in each province or territory, sole proprietors need to complete a form and pay a fee to register their business.

Reporting income as a sole proprietor

From a tax point of view, the money earned as a sole proprietor is considered as personal income. The sole proprietor pays taxes by reporting income or loss on a T1 income tax and benefit return. Because your personal income and business income are one, along with your personal T1 income tax and benefit return, you must file Form T2125 Statement of Business and Professional Activities.

In addition to federal income taxes, you’re also subject to provincial income taxes.

Furthermore, you also need to file a return if you are claiming an income tax refund, a refundable tax credit, a GST/HST credit. You should also file a return if you are entitled to receive provincial tax credits.

Business Number and Canada Revenue Agency

The Canada Revenue Agency (CRA) generally uses a Business number (BN) to communicate with Canadian businesses.

What is exactly the BN?

The BN is a nine-digit number the CRA assigns to your business as a tax ID. It's unique to your business and you will use it to deal with federal, provincial, or local governments.

When do you need a Business Number?

The CRA assigns a BN to your company in case you register for any of the four followings major program accounts needed to operate a business:

  • Goods and services tax/harmonized sales tax (GST/HST) in case your business collects GST/HST;
  • Payroll deductions in case your business pays employees;
  • Corporate income tax in case your business is incorporated;
  • Import/export privileges in case your business imports goods or sells goods or services abroad.

Registering for one of these CRA programs will allow you to get a Business Number. The CRA program account will be added to your Business Number if you already have one.

If you don't fall under the four categories above, you don't need a Business Number. Also, if you are a sole proprietor qualified as a Small Supplier (which means that you are making less than $30,000 annually from all your activities), you could operate without a Business Number.

Goods and Services Tax/Harmonized Sales Tax (GST/HST)

As a sole proprietor, you should be required to register for the GST/HST if:

  • You provide taxable sales, leases, or other supplies in Canada (unless the only taxable supplies are of real property sold other than in the course of a business);
  • You are not a small supplier (see below).

For more information about GST/HST, check the Canadian government website.

Some Canadian provinces have harmonized their Provincial Sales Taxes (PST) with the GST to form the combined HST. Here is a complete overview of charging and collecting sales tax by provinces/territories.

In case a sole proprietors' total sales and services billings are $30,000 or less, they are considered as "small supplier". That means they are not required to register with the tax authorities for the purposes of collecting and paying sales tax (GST and QST) and the CRA doesn't necessarily require them to have a BN. Instead, sole proprietors will use their Social Insurance Numbers (SIN).

What is a small supplier?

According to the Canadian government, "a person is a small supplier during any particular calendar quarter and the following month if the total value of the consideration for world-wide taxable supplies, including zero-rated supplies, made by the person (or an associate of the person at the beginning of the particular calendar quarter) that became due, or was paid without becoming due, in the previous four calendar quarters does not exceed $30,000 or, where the person is a public service body, $50,000".

Social protection

Self-employed workers don't receive employment benefits such as insurance, pension contributions, paid vacation, pension fund, or sick leave.

Nevertheless, they must get civil liability insurance for running their business.

Furthermore, there are government-run plans in which every sole proprietor can participate, such as the Quebec Pension Plan. Keep in mind, employment laws are handled at the provincial level. In Quebec, for instance, there are separate social security contribution rates and rules for termination.

Independent work for clients in another province

Employment laws may differ for each province. Since there is no national minimum wage, the minimum wage and the compensation will depend on the province where the remote worker lives and operates their business.

Misclassification

A number of employers classify their employees as independent contractors in order to avoid paying benefits, leave, etc, even when they should be in fact called employees.

A class action filed on behalf of about 7,000 sales agents hired as independent contractors to sell products door-to-door was certified by the Ontario Superior Court in Omarali v. Just Energy in 2016.

The claim alleges the independent contractors were, in fact, employees, which means that they should have had the right to benefits and protections of the Employment Standards Act (ESA). The ESA states several rights including minimum wage, overtime pay, vacation, and public holiday pay for employees.

Misclassification can lead to a penalty of $250 for the first contravention, $500 for the second in a three-year period, and $1,000 for the third contravention.

In addition to the penalty, a misclassified employee can claim for unpaid entitlements under employment standards legislation.

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