Canada Business Taxes

Below is a practical, step‑by‑step outline you can follow to get an IT‑services company up and running in Ontario when the ownership is split between you (a U.S. tax resident) and a Canadian partner. I’ve focused on the structures that tend to be the simplest to set up, keep compliance manageable, and work well for cross‑border owners.

1️⃣ Choose the legal entity

Option Why it’s often the easiest for a two‑person IT services firm Key tax / compliance notes

Ontario corporation (federal incorporation is also possible, but provincial incorporation keeps the paperwork a bit shorter) • Separate legal personality – limits personal liability.• Allows you to issue shares to both owners right away.• Corporate tax rate in Canada (≈15 % federal + provincial) is lower than personal marginal rates, so retained earnings stay taxed at the corporate level.• Both shareholders can receive a salary (deductible for the corporation) and/or dividends (tax‑favoured). • Must file an annual corporate return (T2) with the CRA.• As a U.S. shareholder you’ll need to file Form 5471 (or Form 8865 for a partnership) with the IRS each year.• If you ever plan to bring the corporation into the U.S. (e.g., via a holding company), a corporation gives you the cleanest path.

Limited Liability Partnership (LLP) – only available for certain professions (lawyers, accountants, architects, etc.) in Ontario. Not suitable for a generic IT‑services business. — —

Sole proprietorship / partnership (unregistered) – easy to start but offers no liability protection and makes it harder to separate personal and business finances, especially across borders. — —

Bottom line: A Ontario corporation (incorporated provincially) is the most straightforward and flexible structure for a two‑person tech services firm with a U.S. owner.

2️⃣ Incorporation checklist (Ontario)

Pick a name

Conduct a NUANS name search (or use a numbered name like “1234567 Ontario Inc.”).

Make sure the name isn’t already taken and that it complies with the “descriptive” rules (e.g., “Tech Solutions Ontario Inc.”).

Decide on share classes & ownership split

Typical split: 50 % each, issued as common shares.

You can also create a “founders’” class with voting rights and a “non‑voting” class for investors later, but for a two‑person startup the simple common‑share structure works fine.

Prepare the Articles of Incorporation (Form 1)

Include the corporation’s name, share structure, any restrictions, and the address of the registered office (you can use a virtual office service if you don’t have a physical location yet).

Appoint directors

Ontario requires at least one director who is a Canadian resident. Since your partner is Canadian, they can serve as the sole director initially.

You can later add a U.S. resident as a non‑resident director if you wish, but at least one director must meet the residency rule.

File incorporation documents

Online through ServiceOntario (or via a third‑party provider).

Pay the filing fee (≈ CAD 360 for a standard incorporation).

Obtain a Business Number (BN) from the CRA

This registers you for corporate income tax, GST/HST, payroll, and import/export accounts if needed.

You can request the BN during incorporation or shortly afterward.

Register for GST/HST

If you expect annual taxable supplies > CAD 30 000, you must register for GST/HST (currently 13 % in Ontario). Even below that threshold, voluntary registration can be useful to recover input tax on business expenses.

Open a corporate records book (minute book)

Keep copies of the articles, bylaws, shareholder agreements, director resolutions, share registers, and meeting minutes.

While not strictly required for a small corporation, having a proper minute book simplifies future audits and compliance.

Draft a Shareholder Agreement (highly recommended)

Covers decision‑making, buy‑sell provisions, dividend policy, dispute resolution, and what happens if one owner leaves or becomes incapacitated.

Because one owner is a U.S. person, the agreement should address cross‑border tax withholding and reporting.

3️⃣ Ongoing compliance basics

Item Frequency Who handles it

Corporate tax return (T2) Annually (by six months after fiscal year‑end) Accountant / tax preparer familiar with Canadian corporate tax

GST/HST filings Quarterly or annually (depending on volume) Accountant or bookkeeping service

Payroll remittances (if you pay salaries) Each pay period (or monthly) Payroll provider or accountant

Annual return to the Province of Ontario Within 60 days of anniversary of incorporation Director(s) or corporate service provider

U.S. reporting (Form 5471) Annually with your U.S. tax return U.S. CPA experienced in foreign corporation reporting

4️⃣ Joint bank account – what to look for

Because the corporation is a separate legal entity, the bank account should be opened in the corporation’s name, not as a personal joint account. Here’s how to pick the right provider:

Feature Why it matters for a cross‑border, two‑owner tech firm

Canadian chartered bank with strong online banking (e.g., RBC, TD, Scotiabank, BMO, CIBC) All major banks support corporate accounts, multi‑user access, and integration with accounting software (QuickBooks, Xero).

Ability to grant “signatory” rights to multiple individuals Your Canadian partner can be a primary signatory; you can be added as an authorized user (even from the U.S.) without needing a physical presence.

Low or no monthly fees for small businesses Many banks waive fees if you maintain a minimum balance (often CAD 5 000–10 000) or meet transaction thresholds.

Support for foreign currency transactions Useful if you invoice U.S. clients and need to convert USD to CAD. Some banks offer “multi‑currency” accounts or integrated FX services.

Integration with payment processors (Stripe, PayPal, Square) Enables you to accept credit‑card payments online without additional merchant‑account setups.

Robust security & two‑factor authentication Critical for an IT services firm handling client data.

Recommended banks for a small tech corporation

RBC Royal Bank – Business Account

RBC Business Advantage Plan: No monthly fee if you keep a CAD 5 000 balance; unlimited electronic transactions; easy online banking.

Supports “Additional Signatories” – you can add your U.S. partner via a secure portal.

TD Canada Trust – Business Banking

TD Unlimited Chequing: Fixed monthly fee (≈ CAD 20) but unlimited transactions, free Interac e‑Transfers, and good integration with QuickBooks.

Offers “Joint Signatory” capability and a “Foreign Currency Account” for USD deposits.

BMO – Business Chequing

BMO Business Essentials: Low fee, free electronic bill payments, and a dedicated relationship manager for startups.

Provides “Multi‑User Access” with customizable permissions.

Opening the account – what you’ll need

Document Who provides it

Articles of Incorporation (or Certificate of Incorporation) Corporation

Business Number (BN) confirmation letter from CRA Corporation

Shareholder Agreement (optional but helpful) Both owners

Personal ID (passport or driver’s licence) for each signatory Both owners

Proof of address (utility bill, lease) for each signatory Both owners

Resolution authorizing the opening of the account and naming signatories Director(s) – signed and filed in the minute book

Most banks allow you to start the application online, but they will require a physical visit (or a notarized document) for the final signature. If you can’t travel to Canada right away, consider using a corporate service provider that can act as the “registered office” and help you open the account remotely; many providers have relationships with the big banks and can submit the paperwork on your behalf.

5️⃣ Quick “cheat‑sheet” timeline

Week Action

1 Run NUANS name search, decide on share split, draft Articles of Incorporation.

2 File incorporation with ServiceOntario; obtain Business Number (BN).

3 Register for GST/HST (if applicable); set up corporate minute book.

4 Draft and sign a Shareholder Agreement (legal counsel advisable).

5 Open corporate bank account (choose bank, gather docs, schedule sign‑up).

6 Set up bookkeeping (QuickBooks Online, Xero, or similar) and payroll if you’ll take salaries.

Ongoing File quarterly GST/HST, annual T2 corporate return, and U.S. Form 5471 each tax year.

6️⃣ Things to watch from a U.S. tax perspective

Form 5471 – Required for U.S. persons who own ≥ 10 % of a foreign corporation. Failure can result in steep penalties, so keep the corporation’s financial statements organized.

Foreign Tax Credit – Canada will tax corporate profits; you can claim a credit on your U.S. return for the Canadian tax paid, reducing double taxation.

Treaty Benefits – The Canada‑U.S. Tax Treaty can reduce withholding on dividends you receive from the corporation (generally 15 %). Ensure the corporation files the appropriate treaty forms (NR301) to claim the reduced rate.

Transfer Pricing – If you later provide services from the U.S. to the Canadian corporation (or vice‑versa), you’ll need arm‑length pricing to satisfy both CRA and IRS rules.

TL;DR

Structure: Incorporate a provincial Ontario corporation (common shares, 50/50 split).

Key filings: Articles of Incorporation → Business Number → GST/HST registration.

Banking: Open a corporate account with a major Canadian bank (RBC, TD, BMO) and add both partners as authorized signatories.

Compliance: Annual T2 return, GST/HST filings, payroll remittances, and U.S. Form 5471 each year.

Next step: Run the NUANS name check and file the incorporation; then move on to the bank account and shareholder agreement.

Guide

Below is a concise “first‑year checklist” of everything you (as a U.S. tax‑resident owner) and the Ontario corporation will need to file and pay when the bulk of the company’s cash is being used for salary and you haven’t declared any dividends yet.

1️⃣ Corporate side – Canada (Ontario)

Obligation When it’s due What you need to do Why it matters

Corporate income‑tax return (T2) Within six months after the corporation’s fiscal year‑end (most start a calendar year, so deadline ≈ June 30 of the following year). • Prepare a T2 return (Schedule 100 – Income Statement, Schedule 125 – Balance Sheet). • Attach Schedule 1 (Net Income ÷ Loss for Tax Purposes) to reconcile accounting profit to taxable profit. • Claim the salary expense you paid to yourself and your partner – this fully reduces corporate taxable income. Salary is a deductible expense, so the corporation will likely have little or no taxable profit in year 1. If the corporation reports a loss, you can carry it forward to offset future profits.

Payroll remittances (CPP/QPP, EI, income tax) Each pay‑period (usually semi‑monthly or monthly). The employer must withhold employee portions and remit the combined amount (employee + employer) to the CRA by the 15th of the month following the pay‑period. • Register for a payroll program account (part of your Business Number). • Calculate: – CPP/QPP contributions (both employee and employer share). – EI premiums (employer pays 1.4 × employee premium). – Federal & provincial income‑tax withholding (use CRA payroll tables). • Submit a ROE (Record of Employment) when an employee stops working. Failure to remit on time incurs penalties and interest. The employer portion of CPP/EI is a real cost to the corporation, so budget for it when you set salaries.

Employer CPP/QPP contributions Same schedule as payroll remittances. • Employer matches the employee’s CPP/QPP contribution (up to the yearly maximum). Reduces net profit further, reinforcing the loss position.

Employer health‑benefit or pension plans (optional) Depends on plan – typically quarterly or annually. • If you set up a private health plan or a Registered Pension Plan (RPP), contributions are deductible for the corporation. Helpful for attracting talent, but adds administrative work.

GST/HST registration & filing Register within 30 days of exceeding CAD 30 000 in taxable supplies (or voluntarily earlier). Returns are quarterly (or annually if you elect). • Collect 13 % HST on taxable services you sell to Canadian clients. • Claim Input Tax Credits (ITCs) for HST paid on business expenses—including the salary‑related costs (office rent, equipment, software, etc.). • File GST/HST return (Form GST34) by the due date (usually the last day of the month following the reporting period). Even if you have no sales yet, you may still have ITCs to recover, so filing on time avoids losing those credits.

Corporate annual return to the Province of Ontario Within 60 days after the anniversary of incorporation. • Submit the Annual Return (Form 1) via ServiceOntario. • Update director/shareholder information if anything changed. Keeps the corporation in good standing; otherwise the province can dissolve the company.

Corporate minute‑book maintenance Ongoing. • Record board resolutions approving salaries, signing the payroll provider agreement, appointing officers, etc. Required if the CRA or a court asks for proof of corporate governance.

Bottom‑line on corporate tax

Because salary is fully deductible, the corporation will most likely report a net loss for year 1. That loss can be:

Carried forward indefinitely (no time limit) to offset future taxable profits, or

Carried back up to three years (if you had prior profitable years, which you won’t in year 1).

No corporate tax is payable until the corporation generates taxable profit after salary expenses.

2️⃣ Personal side – United States (you as a U.S. tax resident)

Even though the corporation is Canadian, the salary you receive is U.S. taxable income (and also subject to Canadian payroll taxes). You’ll have two sets of filings:

Filing Due date What you report Key points

U.S. Individual Income Tax Return (Form 1040) April 15 (with automatic extension to Oct 15 if needed). • Report the gross salary received from the Canadian corporation on Line 1 (W‑2 wages). • Attach Form 2555 (Foreign Earned Income Exclusion) only if you qualify as a bona‑ficio resident of Canada (generally after 330 days of physical presence). Most new immigrants will not qualify in year 1, so the salary is fully taxable. The salary is ordinary U.S. earned income, regardless of where it’s paid.

Form 1116 – Foreign Tax Credit With the 1040 (same deadline). • Claim a credit for Canadian income tax withheld on your salary (the employee portion of CPP/QPP and any provincial/federal withholding). • The credit reduces your U.S. tax dollar‑for‑dollar on the same income, avoiding double taxation. You need a copy of your Canadian T4 slip (Statement of Remuneration Paid) showing the amounts withheld.

Form 8949 & Schedule D (Capital Gains) – not needed now because you have no dividends or share sales. N/A N/A Keep in mind for future years when you start receiving dividends or sell shares.

Form 5471 – Information Return of U.S. Persons With Respect To Certain Foreign Corporations April 15 (attached to 1040). • Required because you own ≥ 10 % of the voting stock of a foreign corporation. • Includes Schedule B (ownership info), Schedule C (income statement), Schedule F (balance sheet), Schedule M (transactions between you and the corporation). Penalties for missing or late filing are severe (starting at $10 000 per form). It’s worth hiring a U.S. CPA who knows foreign corporation reporting.

FinCEN Form 114 (FBAR) – only if you hold foreign financial accounts exceeding $10 000 total at any point in the year. April 15 (automatic extension to Oct 15). • If the corporation’s bank account is in your name (e.g., you’re a signatory) and the aggregate balances exceed $10 000, you must file an FBAR. The corporation itself does not file an FBAR; the individual owners do.

State tax return (if you live in a state that taxes income) Varies by state Report the same salary, claim any foreign tax credit if the state allows it. Some states (e.g., NY, CA) do not permit a foreign tax credit, so you may owe state tax on the full amount.

Practical tip

Ask the Canadian corporation to issue you a T4 slip (the Canadian equivalent of a W‑2). The T4 shows the gross salary, CPP/QPP contributions, EI premiums, and income‑tax withheld. You’ll attach a copy to your U.S. return when claiming the foreign tax credit.

3️⃣ What to budget for in Year 1

Expense Approximate range (CAD) Notes

Salary (gross) Whatever you decide – e.g., CAD 70 000 each Fully deductible for the corporation.

Employer CPP/QPP 5.95 % of pensionable earnings up to the annual max (≈ CAD 3 500 per employee in 2025). Add to payroll cost.

Employer EI 1.4 × employee premium (≈ CAD 1 200 per employee at CAD 900 annual employee premium). Optional if you opt out (self‑employed can waive EI).

Payroll processing service CAD 15–30 per pay‑run (or flat monthly fee). Saves you from manual calculations and filing.

Corporate tax filing (CPA) CAD 800–1 500 for a simple loss return. More if you need extensive advice on cross‑border issues.

U.S. tax preparation (including Form 5471) USD 1 200–2 500 (depends on CPA). Critical to avoid penalties.

GST/HST filing (if registered) Usually free if you do it yourself; CPA charge ≈ CAD 200–400. Keep receipts for all HST paid on expenses.

Bank account set‑up Often free, but some banks require a minimum balance (CAD 5 000) to waive monthly fees. Consider a bank that offers free online transfers to the U.S. (e.g., RBC’s “Cross‑Border Banking”).

4️⃣ Timeline for the first 12 months

Month Action

0–1 Incorporate Ontario corporation, obtain BN, register for payroll & GST/HST (if you expect > CAD 30 k in sales).

1–2 Open corporate bank account, set up payroll service, issue first T4 (even if you pay yourself monthly).

Monthly Process payroll, remit CPP/QPP, EI, and income‑tax withholdings to CRA.

Quarterly File GST/HST return (if registered).

Year‑end (Dec 31) Close books, prepare T2 corporate return (loss).

Feb–Mar Receive T4 slips from the corporation, collect all foreign tax statements.

Apr 15 File U.S. 1040 (incl. Form 1116, Form 5471, FBAR if required).

Jun 30 File corporate T2 (deadline = 6 months after year‑end).

Within 60 days of incorporation anniversary File Ontario annual return.

5️⃣ Quick “cheat‑sheet” for your first‑year tax filing package

Document Who prepares it? When you’ll need it

T2 corporate tax return Canadian CPA / tax software By June 30 (if fiscal year ends Dec 31).

T4 slip Corporation (via payroll provider) End of January (covers previous year).

Form 1116 (Foreign Tax Credit) U.S. CPA (or you if comfortable) With 1040, Apr 15.

Form 5471 U.S. CPA (complex) With 1040, Apr 15.

FBAR (FinCEN Form 114) You (individual) Apr 15 (auto‑extend to Oct 15).

GST/HST return Corporation (or CPA) Quarterly – dates depend on reporting period.

Ontario Annual Return Corporation (or service provider) Within 60 days of incorporation anniversary.

Bottom line for Year 1

Corporate side: Salary wipes out taxable profit, so you’ll likely owe no corporate tax but must still file a T2 (showing a loss) and keep payroll remittances current.

Personal side (U.S.): Report the full salary on your 1040, claim a foreign tax credit for Canadian payroll taxes, and file the mandatory Form 5471 (and FBAR if applicable).

Administrative: Stay on top of payroll deadlines, GST/HST filings, and the Ontario annual return to keep the corporation in good standing.

If you’d like a template for a simple shareholder‑agreement clause covering salary vs. dividends, or recommendations for a low‑cost payroll service that integrates with Canadian and U.S. reporting, just let me know!