Option 2: Sole Proprietorship

A sole proprietorship is one person operating a business, without forming a corporation.  The income of the business is then taxed in the hands of the owner (the proprietor), at personal income tax rates.  The income is considered income from self-employment, and is included on the personal income tax return of the owner. CPP and EI are deducted at source, but not income tax, in accordance with the Canada Revenue Agency’s (CRA) special regulations relating to placement agencies. A T4 Supplementary form is provided to Contractors.

For Income Tax purposes, as a self-employed sole proprietorship, the Contractor must report all business income including any living and travel allowance received, even though this may not have been included on a T4 Supplementary form. Reasonable expenses can be deducted from the business income, including travel expenses, living expenses at the job site, depreciation of automobile, legal, accounting/bookkeeping, insurance, etc. Please consult a tax professional to determine your specific circumstances and eligible deductions.

If the annual revenue of a self-employed sole proprietorship business is expected to exceed $30,000, the Self-employed Contractor must register with the CRA for a GST number, and file the GST return as required.

Advantages of Sole proprietorship:

• Setting up a business in the form of a sole proprietorship is relatively simple and the costs are low.
• If the business loses money, the losses can be written off against other income of the proprietor.
• Sole proprietorships are less regulated than corporations.  The administration is less costly than that of a corporation.  However, sole proprietorships are regulated by the provincial/territorial governments, and the sole proprietorship may have to be registered.
• The proprietor is in control of all decision making, and receives all profits of the business.
  

Disadvantages of Sole proprietorship:

• The most significant disadvantage of a sole proprietorship is unlimited liability.  The proprietor is liable for all debts and other liabilities of the business.  If the business is sued, all the business and personal assets of the owner are at risk.
• If the business is profitable, it will usually be paying higher taxes than if it was incorporated as a Canadian Controlled Private Corporation (CCPC).  The lowest personal income tax rate paid by a sole proprietorship would range from approximately 20% to 29%, depending on the province/territory.  This rate increases with income.  Taxable income over $120,887 (in 2007) is taxed at the highest marginal rates, which range from approximately 39% to 48%, depending on the province/territory.
• A sole proprietorship has a lack of permanence - if the owner dies, the net business assets pass to the heirs, but valuable leases and contracts may not.

Helpful Links

How to register a GST Number in Canada click here
How to register a sole proprietorship in Canada click here

Click here to learn more about incorporated businesses...

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