What are the benefits/disadvantages of structuring a farm business as a sole proprietorship or a corporation? How is HST dealt with for the sale of the business?

Corporation vs. Sole Proprietorship

Choose corporation because:

• ability to control timing and amount of taxable income by being able to choose dividends/salary whenever there is a personal need. As a sole proprietorship, everything earned through the business would be taxed at the personal rate.
• lower corporate tax rate of about 15% federal and provincial combined (if you become a small business corporation) – less taxes means increased cash flow. On the other hand, a sole proprietorship, you would be taxed at the personal marginal tax rate.

Choose sole proprietorship because:

• if losses are incurred, ability to use losses against any other type of personal income (investment, employment, etc.) – can apply losses 3 years back or carry forward 20 years. On the other hand, losses incurred in the corporation would remain with the corporation (carrying losses 3 years back – 20 forward would still apply).
• relatively inexpensive to set-up. You will avoid the financial and administrative costs associated with creating and maintaining the corporate structure (incorporating, resolutions, costly corporate tax returns, regulations, etc). 

HST on purchase of business

• if you acquire at least 90% of all of the property that can reasonably be regarded as necessary to carry on the business, you and the seller may be able to jointly elect to have no GST/HST payable on the sale by completing Form GST44.
• Both you and the seller must be HST registrant
• In addition, you must buy all or substantially all of the property, and not only individual assets.
• If the above 90% is not met, then seller must collect HST and buyer can claim the HST paid as Input Tax Credit on the buyer’s first HST return.

Other important items

• you must be carrying on this farm business with an intent and view to a profit AND as a source of primary income (not as hobby and not as a source of secondary income), only then will you be able to fully use farm losses. Otherwise, the CRA may reduce your eligible loss use to a “restricted farm loss”

ABOUT THE AUTHOR

ALLAN MADAN

CA.CPA.CGA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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