Starting a business in Canada is an exciting journey packed with opportunities, but it also comes with some important decisions and legal responsibilities. The CRA doesn’t provide a checklist for every step you need to take to get your business up and running, so it can feel overwhelming. This guide will help you understand the choices you need to make and the steps to follow.
Whether you’re starting a side hustle, turning a passion into a profession, or aiming to build the next big startup, it’s crucial to know the foundational steps of business formation. We’ll cover the Canadian business landscape from choosing a structure to registering with the CRA and preparing to hire employees.
1. Choosing the Right Business Structure
Before you dive into picking a name or collecting your first payment, it’s important to think about how you want to structure your business. In Canada, the two most common options are a sole proprietorship or a corporation. Each has its own set of legal, tax, and operational aspects that will influence how your business develops.
Sole Proprietorship
A sole proprietorship is the simplest and most common structure. It’s run by one person with no legal separation between them and the business.
Pros
- Easy and affordable to get started
- Income reported on your personal tax return
- Few regulatory requirements
Cons
- You are personally liable for all business debts or legal issues
- Harder to raise capital or grow operations
Corporation
A corporation is a separate legal entity, owned by shareholders. It offers limited liability protection, but comes with more complexity.
Pros
- Owners aren’t personally liable for business debts
- Potentially lower tax rates
- Easier to raise investment or sell the business
Cons
- Higher setup and ongoing costs
- More regulatory oversight and record-keeping
- Corporate income reported on a T2 tax return
How to Choose the Right Structure
- How much risk and liability are you comfortable with?
- How complex is your business model?
- Are you planning to bring in partners or investors?
- What are your long-term goals (growth, sale, or legacy)?
If you’re unsure, it’s wise to consult a small business advisor, accountant, or lawyer.
2. Incorporating Your Business
In Canada, you can incorporate either federally or provincially/territorially.
- Federal incorporation allows you to use your business name across Canada.
- Provincial/territorial incorporation restricts operations to that province/territory.
To incorporate, file your incorporation documents online or through a lawyer. Once incorporated, you must file an annual return with the governing body to keep your corporation active (this is separate from corporate tax filings).
3. Registering Your Business
Getting the Right Licenses and Permits
Depending on your industry and location, you may need municipal business licenses, health and safety certifications, or environmental permits. Requirements vary across provinces and municipalities.
Registering with the CRA
You’ll need a Business Number (BN), a unique 9-digit identifier. When you incorporate, the CRA usually sets one up for you.
CRA program accounts include:
- RT: GST/HST
- RP: Payroll deductions
- RC: Corporation income tax
Each account includes a suffix, e.g., 123456789 RT0001.
Choosing Your Fiscal Year End
Corporations can choose any fiscal year end within 365 days of incorporation. Select a date that aligns with your business cycle.
- Corporate tax return (T2): due 6 months after year-end
- Taxes payable: due 3 months after year-end
4. Understanding GST/HST
What Is GST/HST?
- GST: 5% federal tax on most goods and services
- HST: Combined federal/provincial tax in certain provinces
- The rate depends on your province and your customer’s location
When You Must Register
- You earn more than $30,000 in gross revenue over four consecutive quarters
- You exceed $30,000 in a single quarter
Charging the Right Rate
Rates vary by province. Check the CRA calculator: GST/HST rates. No GST/HST is charged on international sales.
Input Tax Credits (ITCs)
Once registered, you can claim ITCs to recover GST/HST paid on eligible expenses.
Filing and Remitting
File monthly, quarterly, or annually depending on your revenue. Filing late may trigger penalties.
5. Understanding PST
What Is PST?
Some provinces charge PST separately from GST:
- BC: 7%
- Saskatchewan: 6%
- Manitoba: 7%
- Quebec (QST): 9.975%
PST Small Seller Exemption
For example, in BC you don’t need to register if your retail sales are under $10,000 annually.
When You Must Charge PST
- Your business is based in a PST province and exceeds the exemption
- You sell taxable goods/services into PST provinces
Out-of-Province and Online Sales
Selling into another PST province may require registration there, depending on sales volume.
Registering, Collecting, and Remitting
- Register with the provincial tax authority
- Collect and show PST separately on invoices
- Remit monthly, quarterly, or annually
Exemptions and Resale Certificates
Some goods/services are exempt. Resale certificates allow you to avoid paying PST on goods purchased for resale.
6. Setting Up Your Business Operations
Technology and Equipment
- Hardware: computers, mobile devices, POS systems
- Software: QuickBooks, Dext, scheduling and inventory tools
- Connectivity: reliable internet and cloud services
Business Systems and Processes
- POS: Square, Shopify, Lightspeed
- Accounting: QuickBooks for expenses, income, and taxes
- Time tracking: QuickBooks Time for payroll/billable hours
Separating Personal and Business Finances
- Open a corporate bank account
- Set up a corporate credit card (may require personal guarantee)
- Run all transactions through corporate accounts to protect liability, ensure accurate bookkeeping, prove legitimacy, and maintain clear cash flow
7. Hiring Employees and Meeting Labor Requirements
Employment Standards
Employment standards vary by province, but typically include minimum wage, overtime rules, vacation and holidays, anti-discrimination, and equal pay requirements.
Register for a Payroll Program Account
Before paying employees, register with the CRA for payroll deductions:
- Income tax
- CPP contributions
- EI premiums (plus employer’s share)
Use Payroll Processing Software
QuickBooks Payroll or Wagepoint can automate calculations, pay slips, and remittances.
Worker’s Compensation
Register with your provincial authority (e.g., WorkSafeBC). Provides coverage for workplace injuries and protects the business legally.
Owner’s Pay
Two main options:
- Salary: requires payroll account and monthly deductions (EI optional for owners)
- Dividends: paid from after-tax profits, no payroll account required
Final Thoughts
Starting a corporation in Canada is about more than having a great idea—it requires a solid plan, compliance with legal requirements, and organized operations.
Working with a bookkeeper can save time and stress by handling income/expenses, government remittances, and monthly reporting. A good bookkeeper provides clarity, confidence, and actionable data so you can focus on growth.
Disclaimer
This blog provides general information and should not be taken as legal advice. Always consult a lawyer before making final decisions.
