This article is for information purposes only and should not be considered as legal advice. It is strongly recommended that any prospective entrepreneur consult a lawyer in order to make informed decisions that could involve legal matters.
This article provides a basic framework that is intended to provide an overview of some of the issues that you may need to deal with before starting a business in Ontario. We will introduce the different organizational frameworks that can be chosen, various tax implications, licensing requirements, and employment related matters. This is only a basic overview and your business will have specific issues that we can assist you with.
Brief Summary of Ontario
As one of Canada’s most prosperous provinces, Ontario is home to a diverse economic landscape that is capable of nurturing the growth of a variety of businesses of all types and sizes.
Ontario supports a significant number of branded (franchised) and non-branded businesses. The “Golden Horseshoe” in Ontario is a large industrialized region surrounding the west and north ends of Lake Ontario. It makes up over 50% of the population of Ontario and 20% of Canada as a whole. At the centre of this industrialized region is Toronto. Toronto is the largest city in Canada, both in size and area, and is recognized as the financial capital of Canada. According to Forbes, Toronto is the tenth most economically powerful city in the world and ranks among the top 26 cities in Price Waterhouse Cooper’s list of global “Cities of Opportunities.” Many cities in Ontario offer different advantages depending the needs of your business and your particular goals.
A sole proprietorship is the simplest form of business structure that is typically used by people that are new to small business. There are limited, if any, fees involved in setting up this form of business structure. Essentially, everything is attributed to the owner’s personal income statement, including both profits and losses.
However, with the increased rewards and benefits of ownership; there is also additional risk. The sole proprietor takes on full responsibility, personally, for the debts, obligations and liabilities of the company. If you get sued for a “business issue” then the plaintiff can look to your personal assets; such as your home, to satisfy any judgment.
Most sole proprietorships are registered as a business name under the Ontario Ministry of Government Services. Despite having a more formal name, all debts/ obligations can be easily traced back to you.
In a partnership, the risks and obligations are split amongst the partners. The partnership is established with a common objective. A partnership is, therefore, more than one individual acting together as a single entity.
Many partnerships are registered with the Ministry of Government Services. It functions similar to a sole proprietorship however each partner (a partner can be an individual or corporation) takes on the full share of the legal obligations and liabilities of the partnership. This is a potential big risk that you need to consider before structuring the partnership.
There are at least three points to consider before establishing a partnership. Firstly, what will be each partner’s responsibility and role in the partnership? Secondly, what happens in the event of a disagreement or dissolution? Thirdly, to what extent can you protect yourself against being liable for the partnership’s obligations? A carefully thought out partnership agreement will contain the answers to these three questions and protect you in the event of dissolution.
Though outside the scope of this article, it is also important to decide on whether you want to form a general or limited partnership.
In a general partnership, each partner is obligated for the full extent of the partnership’s debts and obligations. A limited partnership is a more complex structure than a general partnership and is composed of one or more general partners and one or more limited partners. Limited partnerships are governed by the Limited Partnership Act R.S.O 1990 which sets out the rights, restrictions and obligations of the members of the partnership. A general partner has most of the rights of control and bears most of the obligations (as in a general partnership); whereas a limited partners’ role, obligations and liabilities are drastically decreased. Limited partners have limited right to control the company but have limited liability for its debts. A limited partner’s liability is determined by his monetary contribution to the company.
As a result of the complex nature of a partnership it is important to carefully draft your partnership agreement to ensure that each partner’s obligations are carefully defined and there are arrangements in place in case of a disagreement or dissolution of the partnership.
A corporation acts as if it is its own legal entity (think of it as a non-human individual) and its governance can be more complex than a sole proprietorship. A corporation can buy, sell and own property and will pay income taxes on any profits. There are many advantages to incorporating your company: shareholder liability is limited; it is a continuous entity where ownership can be transferred; and there are many additional ways to raise capital that you cannot utilize in the other forms of organizational structure.
Cooperatives or Joint Ventures
Cooperatives are not governed by provincial or federal statute. Rather, the cooperative is governed by the contract formed between the respective parties. Cooperatives are primarily used for specific business ventures with one or more parties involved (where the parties can be anything from an individual to a corporation). The agreement includes provisions related to: the operation and management, division of labour, record keeping, both parties’ financial obligations and the specific rewards involved.
Joint ventures are generally considered to be an association of two more persons based on contract who combine their money, property, knowledge, skills, experience, time and other resources in the furtherance of a particular project or undertaking, usually agreeing to share the profits and the losses and each having some degree of control over the venture.
The different forms of business structure lead to different methods and rates of taxation. Sole proprietorships have the simplest tax structure. Sole proprietorships, for tax and liability purposes, are essentially an extension of oneself operating a business. Therefore, the profits and losses of the proprietorship are added to the owner’s income and taxed through his or her personal income tax. There is no reason for the proprietorship to file a second tax return and incur the additional costs or time.
Paying taxes for a partnership is slightly more complicated then a sole proprietorship, however the partnership still does not require a separate income tax filing. Each partner shows their portion of the profits and losses on their personal, corporate or trust income tax return despite whether they received the money in cash or credit. Although a partnership allows for plenty of flexibility as compared with a corporation; if there are six or more members, or one partner is involved in another partnership, the partnership must also file a separate partnership information return.
Overall, corporations have a much more demanding tax structure than sole proprietorships or partnerships. A corporation operates as a separate legal entity from its owners and has many of the powers and abilities that an individual has. As a distinct legal entity from its owners, Corporations are required to file separate income taxes yearly.
Overall, corporations require a much greater expenditure on taxes than either of the other organizational structures. Corporations require greater accounting records and the forms needed to file taxes are much more complex. Additionally, if you are solely invested in a corporation the corporation will be required to pay corporate taxes and then you will be required to pay income tax on your withdrawals, the other structures do not require taxes to be paid twice on the same earnings.
Municipal Property Tax
Property owners are subject to a municipal property tax. The rates change from jurisdiction to jurisdiction although it is also dependant on the expected use of the property (for instance if it commercial or residential there will be a different rate). This tax rate is applied to the assessed value of the property as determined by the Municipal Property Assessment Corporation.
Employers with permanent establishments in Ontario are required to pay a percentage of wages paid to the government for a health insurance plan. Depending on the total remuneration paid to employees the employer will pay from 0.98% to 1.95% of its total annual wages towards the health insurance plan. Certain employees are exempt from this tax for their first four hundred thousand dollars of wages.
On July 1st 2010 Ontario imposed a new sales tax regime. The new system merged the Provincial Sales Tax (PST) and the Goods and Services Tax (GST) and lowered the tax rate to create Harmonized Sales Tax (HST). HST is a federally administered 13% tax that is passed down to the end consumer on the finished product. Certain goods are exempt from taxation or given a tax rate of 0%. Certain items are given a point of sale rebate on a portion of the tax as well.
HST is meant to be a tax on the finished product and therefore only the final purchaser should be paying it.
Labour Relations and Employee Matters
Employees working in Ontario are given benefits under the provincial or federal employment standards legislation. Some industries are federally regulated and subject to the Canada Labour Code R.S.C 1985. Examples of federally regulated industries would be telecommunications, railways and banking.
For the most part, employee relations in Ontario are subject to the Employment Standards Act S.O. 2000 (the “ESA”), with specific exceptions provided for certain fields of work. The ESA sets out the minimums that an employee must offer to his employees. The ESA prescribes a minimum wage that must be given to employees ($10.25 an hour in 2011), the minimum notice of termination, payment in lieu of notice, mandatory holidays, vacation entitlement and other minimums.
Additionally, there are limits prescribed regarding the number of hours an employee can work per day (8 hours) or week (48 hours) without an express agreement. Any employee working over 44 hours a week or on holidays must receive overtime pay (which must be 1.5x regular wages).
The terms of the ESA cannot be contracted out of, nor can employees waive their rights towards those minimums. However, if the employer makes alternate arrangements with his employee with more favourable terms than the ESA, the ESA will not to apply. These arrangements can be made with an individual employee or with a group in a collective bargaining agreement.
For the purpose of the ESA, an employer who purchases all or part of another business and then goes on to hire employees from the past business will be continuous employment for the purposes of the act. A subsequent employer usually must recognize the length of employment with the previous business for the purposes of notice of termination and severance pay.
Violations of the ESA can result in compensation for the losses of the employee or reinstatement at their past position (if improperly terminated in certain circumstances), though the second option is uncommon. Common law legal principles can also apply if the dispute is brought to the courtroom. The common law legal principles are usually more generous to the employee than those within the ESA. For example, notice of termination minimums under statute are approximately one week per year of employment; whereas under common law the notice period can be well over a year; depending on a number of factors.
Human Rights and Equality
In Ontario there is strong support for policies that promote equality and discourage discrimination. Men and woman are entitled to receive equal pay for equal work within the same organization. Any violations in that respect can entitle the harmed party to a variety of restitutions, including salary readjusted or compensation through unpaid wages. These principles are supported by both the Pay Equity Act R.S.O. 1990 and the ESA.
Additionally, employees are entitled to equal treatment under the law without discrimination because of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, marital status, family status or disability. Protection from discrimination based on these grounds is conferred by the Human Rights Code R.S.O. 1990 (the “HRC”). The HRC protects employees from harassment in the workplace and employees from constructive discrimination. Claims under the human rights code are directed towards the Human Rights Tribunal which has the power to institute a variety of remedial measures.
Pregnancy and Parental Leave
Female workers are entitled to 17 weeks of pregnancy leave after 13 weeks of employment. Additionally, both men and women are entitled to receive 35 weeks of parental leave. During his or her leave the employee does not receive wages from the company but retains their benefits. Additionally, the employee on leave is entitled to 55% of their wages (up to $413/week) from the government employment insurance program. The employee on pregnancy or parental leave’s spot in the organization, or something comparable, must be made available to the employee on leave upon return.
Both employees and employers in Ontario are entitled to contribute to an individual’s employment insurance benefit plan. This is paid as a percentage of income. In the event of unqualified termination, layoff, maternity leave, parental leave or illness the employee is entitled to the saved insurance benefits.
Additional to employment insurance, employers and employees are obligated to make payments to the Canada Pension Plan (CPP) as well as implement a private pension plan whose minimums are provided by the Pension Benefit Act R.S.O. 1990.
Workers in Ontario are protected by statute against termination by the ESA. An employer wishing to terminate an employee without just cause must offer the employee either notice of termination or payment in lieu of notice. The ESA sets the statutory requirement of notice at one weeks notice or payment in lieu of notice for every year of employment up to eight weeks of notice or payment in lieu of notice. This minimum cannot be waived in an employment agreement or a collective agreement as outlined before as one of the features of the ESA. Employees who have been unjustly terminated and not provided “reasonable” notice have the ability to claim damages for their unlawful termination. The courts look at many aspects of the employee’s duties including the length of service and the entirety of the events leading up to the termination to determine what a “reasonable” period is. As mentioned before, a “reasonable” period is often construed by the courts to be much longer than the statutory period and can exceed a year.
Licensing & Registration
In order to start a business under a specific name you should first ensure that your proposed business name is not used by another company. Once you have chosen an approved company name you should register for a Master Business License. You may also need to register for a business number. A business number is required for paying HST, payroll or for importing and exporting, however, is not always required.
Many businesses require additional licenses or permits in order to operate legally in Ontario. The license requirements can be federal, provincial or included in the municipal code (such as in Toronto where business licenses are governed by chapter 545 of the municipal code) so it is important to search for the licensing requirements in the specific region. Furthermore, businesses operating without the required licenses can be subject to charges under the applicable bylaws.
A simple example of a business requiring a license is a business that sells alcohol in a bar or restaurant. In order to sell alcohol you must apply and obtain a liquor license. Further, liquor licenses are divided into two types, licenses for permanent establishments and permits for special occasion. Many businesses from street vendors to airlines must obtain licenses in order to operate. The government maintains a certain level of regulation on any business (the level depending on the nature of the business) and may require the business to maintain specific standards to obtain the required licenses.
Overall, it is important to be diligent and understand your licensing requirements which are necessary for your business to avoid fine, etc.
Along with the abovementioned licensing considerations, it may also be important that your business complies with real estate and zoning bylaws. There is an extensive list of regulations governing how retail space, for example, can be used, regardless of whether it is leased or owned. Your home, as a prime example, may not be a suitable location to operate a business. It is important to follow the zoning regulations where it can be possible to apply and change unfavorable zoning restrictions.
Purchasing or Selling a Business
Rather than starting a business from the ground up, it may be beneficial to purchase an existing one. Or on the contrary, there may come a time that you want to sell the business. There are a number of factors to consider and methods of organizing the agreement when buying or selling a business.
Primarily there are two methods of organizing the sale of a business. Both methods have different costs and benefits for both parties in the purchase.
One way to organize the sale is to have the buyer purchase the existing assets of the business. This can be beneficial to the purchaser who is then able to pick and choose which of the assets (and liabilities) it acquires.
Since the purchaser is acquiring each item individually it may be able to lower the taxes payable in the years to come through favorable assessment of asset purchase prices thereby allowing it to claim tax credits, etc. However, the greatest benefit to the purchaser is the ability to pick and choose which of the liabilities to assume. This would include the option of continuing the employment of the previous company’s employees and negotiating that the vendor be required to pay severance for those whose employment is terminated.
The alternate style of organizing the purchase of a business is to have the buyer purchase shares of the existing company. In this way the purchaser will obtain the prior owner’s interest in the company, including its assets and liabilities. There are a number of tax and liability issues that need to be considered with a lawyer and an accountant before proceeding. However, you need to keep in mind that when the shares of a corporation are sold the owner steps into the shoes of the prior shareholder and all assets and liabilities remain with the company unless negotiated out.
Both methods of selling or purchasing a business have their strength and weaknesses; however, you should speak with us to discuss how best to structure your transaction.
The use of modern technology allow for industries to collect substantial quantities of information from a consumer and that information can be used for invasive functions, disclosed or used for inappropriate purposes. The Personal Information Protection and Electronic Documents Act, SC 2000 (“PIPEDA”) protects consumer privacy in the Canadian private sector, with exceptions for journalistic or artistic works. Though other provinces have specific legislation tailored for their province, Ontario is not one of them.
In short, the PIPEDA strikes a balance between the need of organizations to collect and make use of personal information and the person’s right to keep their personal information personal. Under most circumstances, the use, collection or disclosure of personal information requires the prior consent of the individual and notification of the specific uses. The uses must be appropriate to a reasonable person. There are only limited exceptions where prior consent is not necessary.
The Privacy Commission of Canada (PCC) is responsible for overseeing the practices of organization with respect to the PIPEDA and the Privacy Act (though the Privacy Act is only relevant to government organization). Organizations that are suspected of violating the PIPEDA or have received complaints are subject to audit or investigation. Though the PCC itself cannot give binding orders it can refer the case to the Federal Court of Canada which has a wide range of remedial powers. Overall, the PIPEDA is administered by the PCC and ensures that businesses do not take advantage of their customers and use their personal information unlawfully and without their permission.
Consumer Protection Act
The Consumer Protection Act (CPA) applies to protect consumers purchasing throughout Ontario. Therefore, it is important for any supplier of goods within Ontario to have a grasp of the rules and regulations within the CPA to avoid a breach. It provides a set of statutory warranties, prevents false or misleading representations, prevents negative contract formation and requires that suppliers provide full disclosure in consumer arrangements. The terms within the CPA apply to many purchases or agreements made in Ontario and cannot be contracted out of. Damages as a result of violations to the CPA range from rescission of the purchase agreement to monetary fines.
Sale of Goods Act
The Sale of Goods Act implies certain conditions to protect the consumer when there is a sale of goods or services. There are a number of important provisions in the legislation, but we would highlight the following: Firstly, the seller must always be sure to have the right to sell the goods. Secondly, all items sold by sample have to correspond to that sample. Thirdly, the legislation implies a number of conditions to the terms of the contact; two of which are that the goods must be of merchantable quality and, if there is a stipulation regarding its intended use, it must be fit for that purpose. What is also worth mentioning is that, unless otherwise stipulated in the contract, the burden of delivering the goods is on the seller.
The Sale of Goods Act also protects the vendor. It establishes when the vendor should be paid and gives legal protection if the buyer refuses to pay for the goods. It gives the vendor the right to place a lien on the goods, the right to prevent delivery and authorizes them to resell the goods in certain situations.
Insolvency and Restructuring
If need be, corporate restructuring in Ontario is regulated by the Companies’ Creditors Arrangement Act (CCAA) or the Bankruptcy & Insolvency Act (BIA).
By way of a very brief outline of this complicated area of law, the BIA offers a set of rules and regulations in the event that a business has no money to pays its creditors. Immediately after filing for bankruptcy all proceedings against the bankrupt are stayed. All assets of the bankrupt are then vested in a trustee with the obligation of administering the claims process and satisfying the creditors as best as possible. Secured creditors often appoint a receiver (or allow the court to appoint one for them) to help them claim what is owed to the creditors. The plan to distribute assets must be given to the court for approval and, only once approved, can be voted for or against by the affected creditors.
This article only briefly touched the myriad of issues related to doing business in Ontario. We would enjoy the opportunity to assist you in navigating the challenges that you may face both before or after you have set up your business in Ontario.