Deciding On The Structure Of Your Business? Things You Need To Know

Article by Jordan K.M. Brown, Patrick Fitzgerald, Matthew Gorman, Athar K. Malik, Griffith D. Roberts, Daniel L. Stevenson and Peter T. Zed

Cox & Palmer

Sole Proprietorship

In a sole proprietorship, an individual is the sole owner of the business and is personally responsible for all the debts, obligations and liabilities related to the business. All the benefits and the profits from the operation of the business are considered to be those of the sole proprietor.


  • Direct control of decision-making
  • Inexpensive to form
  • Relatively low start-up costs
  • All profits go to the sole proprietor


  • Unlimited personal liability of the proprietor (creditors can seek recourse against the personal assets of the sole proprietor to pay off any business debts)
  • Treated as self-employed for income tax purposes, which generally means higher tax rates
  • Difficulty raising capital or attracting investment
  • Difficult to provide employee incentives (no shares to issue, no option plan etc.)
  • Most established government grants or assistance programs are geared towards corporations


A partnership is a business structure where an individual carries on a business with one or more partners. The partners combine their financial resources into the business. An agreement between the partners can establish the terms of the business and protect each partner in case of a disagreement or dissolution of the company. As a partner, each individual shares in the profits and losses of the business according to the terms of the agreement.

When establishing a general partnership, the partners should have a partnership agreement drawn up with the assistance of a lawyer to ensure that their interests are protected and that issues like profit sharing, business responsibilities and dissolving the partnership are clearly established.


  • Inexpensive to form
  • Sharing of the management, assets and profits of the business (depending on terms of partnership agreement)


  • Unlimited liability (if the partnership has business debts, personal assets would be used to pay off the debt)
  • Joint and several liability – individuals can be held financially responsible for the business decisions made by their partner
  • Partners are self-employed for tax purposes, which means income is taxed at personal rates
  • Negotiations of partnership agreement can be expensive


An incorporated business is a legal entity that is considered to be separate from the shareholders (owners). Incorporation can be done at the federal or provincial level. A shareholder of a corporation is generally not personally liable for the debts, obligations or acts of the corporation. A corporation may carry on business, incur liabilities and own property and the profit or loss from these activities belongs to the corporation rather than the shareholders or directors. The income of the corporation is taxed at a rate that is applicable to the corporation (which are generally lower than personal income tax rates). It is always important to seek legal advice before incorporating.


  • Limited liability of shareholders
  • Transferability of ownership
  • Continuality of existence if wished (companies do not die)
  • Separate legal entity from the incorporators
  • More attractive to investors and easier to raise capital
  • Possible tax advantages through combinations of lower corporate income tax rates and dividend strategies
  • Ability to provide equity incentives to employees (shares and/or stock options)
  • Many government grants and programs are made accessible


  • Generally more expensive to incorporate (compared to carrying on as a partnership or sole proprietorship)
  • Corporate record keeping is required and the company has annual filing obligations
  • Potential for control issues if multiple shareholders
  • Corporations are required to file a separate tax return from the owner(s)
  • Subject to corporate legislation, there is a need for legal advice
  • Negotiation of shareholder agreements can be expensive but shareholder agreements are a key component in protecting a company with high growth potential

Corporate Name

Choosing the right name for the corporation is an important decision for most start-ups. The name should be distinctive to differentiate a corporation from its competitors. It should provide information about the product or services offered and a good name will help to attract potential customers and build the company’s brand.

Note: a business or corporate name is not the same thing as a trademark and does not provide the same protection. In many cases, a business or corporate name can also be used as a trademark, but it is important to seek legal advice on the distinction. It is also advisable to confirm you are not infringing on someone else’s rights and to seek protection for your trademarks through registration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

An Auditor’s Standard Of Care

An Auditor’s Standard Of Care
Article by John G. Bassindale and Jack Millar
Millar Kreklewetz LLP
For years it was an open question as to whether or not a Canada Revenue Agency (“CRA”) auditor owed a duty of care to a taxpayer under audit. In the recent case of Leroux (2014 BCSC 720) the Supreme Court of British Columbia (BCSC) concluded that, on the facts, the CRA auditors owed a duty of care to the taxpayer. But what is the appropriate standard of care a CRA auditor must meet to avoid a finding of negligence?

Briefly, Leroux was the case of a taxpayer who was assessed by the CRA, had the majority of his assessment overturned, and then brought a civil action for damages against the CRA. The BCSC determined that a duty of care was owed to the taxpayer based on recent SCC cases about when a public official owes duty of care. Paralleling the standard imposed on police officers in Hill v. Hamilton-Wentworth Regional Police Services Board (2007 SCC 41), the BCSC stated that the standard of care which was owed to the taxpayer was “that of a reasonably competent tax auditor in similar circumstances”.

Such a standard should not be a surprise to the CRA because one would presume that the CRA would expect that all of its auditors would meet the threshold of a “reasonably competent tax auditor”. The CRA often speaks of the high quality of its auditors, and how few of their audits are overturned on objection or appeal. This also accords with the Taxpayer’s Bill of Rights which includes a “Right to expect the CRA to be accountable” and a “Right to be treated professionally, courteously, and fairly”.

The BCSC found that the CRA auditor met the standard of the “reasonably competent auditor in similar circumstances” in the GST audit and in the characterization of the receipts (income versus capital) for income tax purposes; however, the BCSC also held that the standard was not met with respect to the imposition of penalties and the assessing of statute barred years – two areas which often arise in tax audits.

The BCSC found three specific areas of negligence.

First, the CRA auditor was found to have applied the wrong standard for imposing penalties. A penalty was imposed under section 163(2), which requires the taxpayer either made a false statement “knowingly” or “under circumstances amounting to gross negligence”. However, the auditor’s Penalty Recommendation Report said the taxpayer “ought to have known” – which he BCSC held was insufficient foundation for a section 163(2) penalty. Accordingly, the CRA auditor did not meet the standard of care of a reasonably competent auditor on this issue.

Secondly, the CRA auditors applied penalties to all taxes assessed in all years. The BCSC noted that this was inappropriate because the penalty should only apply to the issue where the CRA auditor felt the taxpayer had been grossly negligent – not on the entirety of the tax assessed. In other words, penalties should be considered by CRA auditors and imposed on an “issue by issue” basis rather than being applied “holus-bolus”. After noting the CRA auditor “thought this did not matter” when imposing penalties, the BCSC found the CRA auditor did not meet the standard of care of a reasonably competent auditor on this issue.

Lastly, the BCSC held that it was unacceptable that the taxpayer was threatened with “gross negligence” penalties if he did not sign a statute barred waiver for 1993. The BCSC found the auditor did not meet the standard of care of a reasonably competent auditor and should “not have threatened the taxpayer with a punitive quid pro quo.” Additionally, the BCSC noted that because the tests for gross negligence requires higher threshold than for opening up of statue barred years, the auditor should not have equated the two tests.

We are particularly hopeful that the CRA will take note of the BCSC’s comments regarding the conduct of its auditors when dealing with penalties and requests for waivers. We understand from speaking to other practitioners that the approach taken by the CRA auditors in Leroux is not uncommon. In our experience, auditors typically apply a penalty to the entire assessment, rather than on an “issue by issue” basis. Likewise, we have seen a CRA auditor on a recent file threaten and ultimately impose gross negligence penalties when the waivers offered were not to their liking. It is a breath of fresh air to see that a judge has found these common audit actions to be in appropriate.

If such situations arise in the future, practitioners should consider raising the BCSC’s standard of care comments with the auditor and/or with senior CRA officials as may be required. Irrespective of whether a duty of care is owed to all taxpayers in all circumstances, we would expect the CRA’s position to be that all of its auditors must meet the standards of a reasonably competent auditor in all audits conducted and assessments issued.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.