Answers to these questions are not an exhaustive treatment or analysis of such subject(s) and related law. Accordingly, information herein is not intended to constitute accounting, tax, legal, investment, consulting or other professional advice or services. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. Use of information is at your own risk.

1. Employee and Payroll Expenses
   1. My business hired some workers who are supposed to be self-employed. Do I need to pay payroll expenses on fees paid to these workers?

      If the Canada Revenue Agency (CRA) forms an opinion that these workers are not your employees, there is no payroll expenses on fees paid. While some business relationships are clearly not of an employer-employee type, others are not so obvious. CRA actively challenges this type of business relationship, especially in some industries such as construction. CRA uses the following tests in determining whether there is an employer-employee relationship: whether the worker receives a fixed pay periodically and reports to an employee of your business who gives directly instructions, evaluate performance to determine remuneration; whether the worker has registered a business (GST) number and is doing for or seeking work from other businesses simultaneously; the extent of independent control the worker has regarding what work will be done and the manner in which it will be performed; whether the worker supplies equipment or tools required to perform and/or covers insurance, repairs and maintenance for this equipment whether the worker may subcontract work or hire assistants whether the individual incurs any fixed ongoing costs or expenses that are not reimbursed the degree of autonomy and independence in management of the worker's business; whether the worker could earn a profit or suffer a loss if work expectations are not fulfilled; for example if the individual has the right to negotiate the price of services and the right to offer those services to more than one organization. Be mindful that CRA considers a number of, not a single, factors in determining whether there is an employer-employee relationship. This is a question of fact. If the CRA later determines that self-employed workers are indeed your employees, your business will be held liable for failure to remit employment insurance and Canada Pension Plan premium along with penalties and interest. For more information on this issue, please refer to CRA guide titled "Employee or Self Employed? (RC4110(E)". [This answer was added on May 4, 2009.]

2. Incorporation
   1. When is now a good time to incorporate a limited company to run a business?

   Generally speaking, if a small business is earning more profit than what its sole proprietor needs personally, incorporation may be a good idea. Incorporating gives its shareholders more options for the distribution of income, tax and estate planning. Another advantage is that the protection of personal assets from potential creditors. [This answer was added on April 9, 2009.]

   2. Can incorporating my business protect my personal assets?

      Incorporation provides certain degree of protection of personal assets by limiting liability from potential creditors. However, in most cases financial institutions (a main creditor to most small businesses) require a personal guarantee from the principal shareholder(s) of a small business corporation before granting credit. This severely limits this advantage to incorporation. Moreover, personal assets are not protected against certain types of tax liabilities. [This answer was added on April 9, 2009.]

   3. I am employed now. Can I incorporate to reduce my tax burden?

      Technologies have changed our lifestyle and work habit. Some of us do not have to work in the office every day. This muddles a typical employer-employee relationship and gives rise to the issue of "incorporated employee" if an individual taxpayer runs a business in form of a corporation and provides services to a small number of clients. By incorporating, one may pay less tax because of more deductible expenses and/or a lower small business corporate income tax rate. To curb this scheme, Canada Revenue Agency (CRA) argued unsuccessfully that these corporations were a puppet of the employee and effectively a sham. The individual taxpayer should hence be taxed directly on the income earned by his corporation. However, tax courts disagreed and ruled that if the corporation was formed properly, it was not a sham and the income was taxable to the corporation. The Personal Services Business (PSB) rules were then introduced as a result of these court cases to prevent individuals from gaining access to the small business deduction. If CRA is successful in arguing that a corporation is carried on as a PSB, there are two tax consequences: Small business deduction, both federally and provincially, of the corporation will be disallowed. In Québec, the PSB income will be taxed at 16.25% rather than at the 8.9% rate that applies to business income in general. When computing income from the PSB, eligible deductions will be restricted to: Remuneration and benefits for the incorporated employee; If the incorporated employee is a salesperson receiving commissions, expenses paid by the corporation that would have been allowed as a deduction to the individual personally as a commissioned salesperson had he/she incurred the expense; and Legal expenses incurred by the corporation in collecting amounts owing to it on account of services rendered. If you earn your income by providing services to a small number of businesses, you always need to carefully determine whether you are an employee or self-employed. Tax treatments of eligible expenses for income tax purposes are different. There will be tax consequences if your status is misclassified. If you incorporate, the stakes are even higher. If it turns out that you are an incorporated employee, the tax cost will also multiply. Seek professional advice before implementing your plan and filing your tax return. [This answer was added on December 31, 2010.]

3. Activities Involving Research and Development
1. Is there any tax incentives to encourage research and development activities?

   For qualifying scientific research and experimental development (R&D) expenditures in new products and processes, there are three major tax benefits: a full tax deduction in the year the expenditures are incurred, even if they are capital in nature; the ability to "pool" R&D expenditures, which enables taxpayers to carry over deductions to the extent that they are not needed currently; and eligibility for attractive refundable investment tax credits. These tax benefits are available to both incorporated and unincorporated businesses. In addition to the aforesaid federal tax incentives, many provinces have their own R&D tax incentives. Tax rules in determining R&D benefits are complicated and often attracts the attention of tax auditors as the refundable tax credit is quite generous. It is advisable to consult a tax professional before making a claim. [This answer was added on May 5, 2009.]

4. Others
   1. Can I change my fiscal year end? If yes, how?

      Sole proprietorships, members of a partnership in which all the partners are individuals and corporations are the only forms of business that can have a fiscal year end other than December 31st. If you do your business in any one of the aforesaid form, you can select your fiscal year end when you file your first tax return. Once you have selected a fiscal year end, you may not change it without approval from Canada Revenue Agency (CRA). Approval will not be granted unless there are sound business reasons such as a business wanting to change its fiscal year end date to coincide with a seasonally slack period or a corporation changing its fiscal period so that its fiscal year end date is the same as its parent company. This is to prevent undue tax minimization by changing fiscal year end, hence taxation year end. It is noteworthy to remark that changes to your fiscal year period that occur because the fiscal year period is "revised by operation of law" do not need to be approved. For instance, if your business's fiscal year period changes because a sole proprietor dies or sells the business, because a partnership ceases to exist, or because a corporation goes bankrupt, you don't have to request approval for a change in your fiscal year end. Reference: IT-179R Change of fiscal period [This answer was added on December 18, 2010.]

   2. There is a loss (negative net income) in my incorporated business. Can this loss be carried backward and forward?

      Losses resulting from business operation are non-capital losses. A corporation may carry these losses according to the following rules: back 3 years and forward 7 years if the loss was incurred in a tax year ending prior to March 23, 2004; back 3 years and forward 10 years if the loss was incurred in a tax year ending after March 22, 2004; back 3 years and forward 20 years if the loss was incurred in a tax years ending after 2005. However, this extension does not apply to a non-capital loss resulting from an allowable business investment loss (ABIL). Instead, a non-capital loss resulting from an ABIL arising in tax years ending after March 22, 2004, that has not been used within ten tax years will continue to become a net capital loss in the eleventh year. Furthermore, a non-capital loss resulting from an ABIL arising in tax years ending prior to March 23, 2004, that has not been used within seven tax years will continue to become a net capital loss in the eighth year. [This answer was added on 19 December 2010.]

   3. What are the tax implications of loans to shareholders or someone related to one?

      It is common that shareholders of a small business corporation loan money to the corporation at the beginning to start a business. A loan from shareholder(s) account on the liability of the corporation's balance sheet is commonly to record transactions of this nature. Money lent may be repaid to shareholders without tax implications. However, if the shareholders overpay (ie. running a negative balance on the loan from shareholder account), a loan to shareholders is made. This loan is generally considered to have been made by virtue of shareholding, rather than employment (if the shareholders also work as salary employees). The full loan amount had to be included in the shareholder's income (subject to CPP, employment insurance, if applicable, and withholding tax) unless it is repaid in full within 12 months of the corporation's current fiscal year end. The bona-fide loan repayment could NOT be part of a series of loans and repayments (ie. repayment and borrowing again in the future like in a revolving line of credit are not considered repayment for income tax purposes). Furthermore, loan to shareholders is a taxable benefit at a CRA prescribed interest rates on the loan principal. Loan repayments are applied to the outstanding balance on a first in, first out basis. If bona-fide repayments are made within a reasonable time, the loan may not be considered personal income if it occurred in the ordinary course of the lender's business or was made to enable shareholders to: acquire a dwelling for their own use; or purchase an automobile for use in the course of employment; or purchase fully paid shares from the corporation or a related corporation (provided that the shares are held by the shareholders for their own benefit). It is important to keep the loan from shareholder balance above zero to avoid adverse tax consequences.