When it comes to the structure of your e-commerce business in Canada, you have three options: Sole Proprietorship, Partnership, or Corporation.

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Sole Proprietorship

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Structuring your e-commerce business as a sole proprietorship limits your tax planning options but also lowers your accounting fees since everything is run under your own name. A sole proprietorship is suitable for businesses that are just starting with few personal assets to protect. Remember, your personal assets are exposed to any business liabilities or lawsuits you may incur.

For example, if you are a sole proprietor who works out of your home, you report your income and then deduct expenses related to internet service, office supplies, advertising and other qualifying home office costs.

Sole proprietors of Internet businesses must fill out the portion of Form T2125, Statement of Business and Professional Income that relates to your businesses.

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Partnership

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Partnerships can minimize both legal and accounting fees as the accounting under this type of business structure can be relatively simple. Partnerships are not required to file any additional forms, regardless of whether the business is based online. However, it can also be risky because all general partners expose their personal assets to any business liabilities incurred.

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Corporation

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If your Internet business is a corporation, you must also file Schedule 88, Internet Business Activities with your T2 corporation tax return. For most e-commerce sellers, operating as a corporate legal structure is the best option. Although your accounting fees will be much higher, you will also have limited business liability. That means your e-commerce business will be separate from your personal assets. What’s more, you can defer taxes on the net income you make which you don’t need for personal expenses.

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The main advantage is that Canadian-controlled small business corporations are taxed at a much lower rate on their active business income. The combined small business tax rate will be somewhere between 13-15% on the first $500,000 of net income. Any losses you incur are trapped in the corporation, so you can’t apply them against your employment income.

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Sales tax

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As a business operating in Canada, you must collect sales taxes if:

• Your business is located in Canada, using Canadian warehouses or infrastructure, or you have some form of physical presence, etc.
• If your sales exceed CAD 30,000 in the last four quarters.
• If your business sells taxable supplies (most goods and services fall under this category; medical services and supplies, toll/fairy charges, and daycare services are some exceptions.)

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There are two categories for Canadian sales taxes: Federal and Provincial. Your place of business and place of product/service delivery will determine which taxes you need to collect. Once you have set up your e-commerce sales tax accounts, you can claim Input Tax Credits (ITC) on sales taxes that you paid on your expenses.

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For example, if you collected $2,000 in sales taxes and spent $500 in sales taxes on your inventory or costs, your e-commerce business will only need to remit $1500.

While sales taxes are the amounts you collect, hold, and then give to the government, income taxes are an expense to your business. These are paid on the net income after you deduct all allowable business expenses.

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If you earn income from Web pages or websites, the CRA requires you to list them on your tax return. If you have more than five websites, you must list the top five websites which earn the highest income. You are not required to report websites that do not earn money.

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For example, if you run a website where you sell shoes, you must report income from that site and list it on your tax return. However, if you also have a blog that does not generate money, you are not required to report or list that website.

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