Starting Together: Partnership or Corporation?

If my spouse and I both work in one business, are we partners?

Working together does not, by itself, make spouses partners. In the common-law provinces, a partnership requires a business carried on in common with a view to profit; Quebec uses a civil-law test that includes cooperation, contributions and sharing the resulting profits. The arrangement and what both people actually do matter more than the label on a form (CRA: partnership test).

For example, if one spouse owns the client contracts and the other helps with administration, the work alone does not establish that both own the business. If both intend to run it for their joint benefit, contribute to it and share its results, they may be partners. Spouses can form a partnership, but the CRA notes that the relationship needs clear support in law. Paying a spouse for work raises a different question; see Paying family members.

What shows that we carry on the business together?

A real partnership is shown by the agreement and the way the co-owners work with clients, money and decisions. Registration or a written agreement helps record the arrangement, but neither makes an inactive or different arrangement a partnership (CRA: partnership test).

Check who signs contracts, controls the work, contributes money or property, pays shared costs, makes decisions and bears the result. Record each person's contributions and the agreed profit and loss shares. A written agreement should also cover withdrawals, who can commit the business to a debt, how disputes are resolved and what happens when someone leaves. The CRA lists these as matters commonly covered by partnership agreements. Actual conduct must match the agreement.

If we each invoice our own clients, whose income goes on each return?

If each person genuinely runs a separate business, each reports that business's own client revenue and deductible expenses on their own T1, normally using Form T2125. Separate invoices are evidence, but the entire working arrangement decides whether the businesses are separate (CRA: partnership test; CRA: Form T2125).

Two people may share office costs without sharing a business. Conversely, sending separate invoices from a common venture does not necessarily turn it into two sole proprietorships. Trace each client contract, payment, expense and asset to its real owner. Do not divide one person's business profit between spouses merely because both worked on it. If the work belongs to a partnership, calculate the partnership result first, then allocate each partner's share.

How do partners decide each person's share of profit or loss?

Partners should agree on the split when they start, then apply it to the partnership's actual result. The split need not be equal. Under section 103, a split mainly intended to reduce or postpone tax can be adjusted to a reasonable one; an unreasonable split between partners who do not deal at arm's length, including spouses, can also be adjusted based on their work, capital and other relevant facts (CRA: partnership; Income Tax Act, section 103).

Put the split and any changes in the agreement. Keep records of each person's work and contributions, especially when their roles differ. A retroactive split chosen after profit is known may be difficult to support. Cash each partner withdraws is separate from the agreed allocation of profit.

Should cofounders form a general partnership or incorporate before invoicing?

Use separate sole proprietorships only if you truly run separate businesses. For one shared venture, a general partnership is simpler to establish, while a corporation is a separate legal entity that contracts, invoices and reports its own income (CRA: partnership; CRA: corporation).

Choose the name on contracts and invoices before work begins. Incorporating after a partnership has already taken clients and assets creates a new entity and CRA business number; existing program accounts do not simply move to it. If one of two partners leaves and the other continues alone, check the legal status and CRA accounts: in Quebec, a partnership with one remaining partner dissolves if nobody joins within 120 days (Revenu Québec: partnership; CRA: change of legal status). The tax cost of a later transfer belongs in Moving a business into a corporation. Whether incorporation reduces tax or mainly delays personal tax depends on owner pay; see Sole proprietorship or corporation. Corporate rates are covered in How corporations are taxed.

Who pays business debts?

Each general partner has unlimited personal liability for partnership debts, including a full debt the other partner created within their authority; profit shares do not cap a creditor's claim. A sole proprietor who employs staff owes required payroll deductions and contributions directly, as well as their own business taxes (CRA: payroll deductions). Under Excise Tax Act section 272.1(5), current and former general partners are jointly liable for GST/HST amounts payable before or during membership, though pre-entry liability is limited to partnership property; dissolution can extend liability. Leaving does not end liability. Excise Tax Act section 313 sets a ten-year collection period that can restart (CRA: partnership test; Excise Tax Act, sections 272.1 and 313). Shareholders generally do not owe corporate debts merely for holding shares, but may sign guarantees. If a corporation transfers property to a non-arm's-length shareholder for less than fair value, Income Tax Act section 160 and Excise Tax Act section 325 can make the recipient liable for the transferor's tax up to the statutory limits; the CRA can assess the recipient at any time (Income Tax Act, section 160; Excise Tax Act, section 325). Under Income Tax Act section 227.1, Canada Pension Plan section 21.1, Employment Insurance Act section 83 and Excise Tax Act section 323, directors can owe unpaid payroll withholding, CPP/EI remittances and GST/HST net tax, plus interest and penalties if collection conditions are met. Due diligence can relieve them; recovery under section 227.1 and assessment under section 323 must begin within two years after they last cease to be directors, with the income-tax limit extended to CPP/EI directors (Income Tax Act, section 227.1; Canada Pension Plan, section 21.1; Employment Insurance Act, section 83; Excise Tax Act, section 323).

The choice matters before either person signs a lease, borrows, or accepts a contract with a significant claim risk. Read who is named as the customer-facing party and who signs personally. A corporation also brings its own filing and record duties. A liability decision should be made with the actual contracts and planned risks, not just the expected tax rate.

Does the partnership file a T5013, and how does each partner report income?

A partnership does not pay income tax on its ordinary operating result. Each partner reports their share even when the partnership does not have to file a T5013 information return. If a T5013 is required, the partnership issues slips; otherwise partners use its financial statements (CRA: partnership; CRA: T5013 guide).

These are the CRA's current T5013 filing criteria. The threshold relief is a CRA administrative policy, so check other triggers even for a small venture. If both partners are individuals and a T5013 is required, file it and give the slips by March 31 after the calendar year in which its fiscal period ended. A late T5013 can cost $25 per day, at least $100 and at most $2,500 (CRA: T5013 guide). A new partnership of individuals carrying on business in Canada normally uses a calendar fiscal year. If eligible, an authorized partner can make the subsection 249.1(4) off-calendar election; each partner signs Form T1139 and files it with their T1 by June 15 of the year after the business begins (CRA: T5013 guide; CRA: Form T1139, pages 1, 4–5). Each individual partner generally files Form T2125 with their T1 for business or professional income. With T5013 slips, each puts the slip's share at amount 5A in Part 5. Without slips, each reports the partnership's income and expenses, enters their net share at 5A, and lists the other partners in Part 8. Qualifying unreimbursed partner expenses go in Part 6 (CRA: Form T2125, pages 3–4). A corporation instead files a T2; shareholders report amounts paid to them, such as wages or dividends, on their own returns. For whether a partner's loss can offset other income, see Business losses.

In Quebec, individual partners also file a Quebec return with Schedule L and, as applicable, TP-80-V. A partnership required to file TP-600-V files it and issues RL-15 slips by March 31 for two individual partners. Quebec's filing relief requires revenue plus expenses and assets strictly below $2,000,000 and $5,000,000, without disqualifying partners or activities. A late TP-600-V costs $25 per day, capped at $2,500. For an off-calendar election, the authorized partner sends Revenu Québec a copy of T1139 within 30 days and no later than their Quebec return deadline; each partner then files TP-80.1-V annually. A corporation with a Quebec establishment generally files CO-17 as well as T2 (Revenu Québec: partnerships and income tax; TP-600 guide; CO-17).

What must we register when starting?

Check the registration rules where you operate and which CRA accounts your structure needs. Provincial and territorial rules vary. An unincorporated business needs a CRA business number when it registers for a CRA program account; incorporation also requires one (CRA: when you need a BN).

In B.C., for example, a general partnership formed for trading, manufacturing or mining must file a registration statement within three months of formation; other partnerships may not have to register. A sole proprietor doing that work under a business name other than their own must file within three months of first using the name. These are B.C. rules, not Canada-wide rules (B.C.: Partnership Act, sections 81, 82 and 88). A federal corporation must also check registration in every province or territory where it conducts business (Corporations Canada).

In Quebec, a general partnership must register with the enterprise registrar within 60 days of becoming subject to registration and obtain a Quebec enterprise number. A sole proprietor using a name without their first and last names must also register (Quebec: enterprise registration; registration guide).

Is a partnership a separate person for GST/HST?

Yes. For GST/HST, the partnership is a separate person from its partners and reports the tax on the business it carries on. That differs from income tax, where the partners report the operating profit (CRA: partnership test).

For most businesses, the partnership generally must register when it makes taxable supplies in Canada and is no longer a small supplier. The usual small-supplier test looks at worldwide taxable sales, including zero-rated sales, of the partnership and its associates; the threshold is $30,000 in one calendar quarter or over four consecutive quarters (CRA: when to register). A small supplier making taxable supplies may register voluntarily. If the people truly run separate sole proprietorships, each person must count taxable sales from all their businesses and any associates under the applicable CRA rule. In Quebec, check QST registration with Revenu Québec too; its general small-supplier test uses the same threshold (Revenu Québec: small suppliers). For exact start dates and exceptions, see When to register for GST/HST.

Example

Illustrative amounts in Canadian dollars. Two spouses sign client contracts as one renovation partnership. In its first year, the partnership bills C$100,000 before GST/HST for taxable work and has C$40,000 of deductible business expenses, leaving C$60,000 of profit. Before work begins, they agree to share profit equally, and each contributes substantially to the work. Each reports C$30,000 of partnership profit on their own T1 using Form T2125, even if one withdraws C$20,000 and the other withdraws C$40,000. They retain the agreement, invoices, expense records and evidence of each person's work. They check whether a T5013 is required. If their first taxable supply is C$35,000 on March 2, they exceed the small-supplier threshold in that quarter. They must charge GST/HST on that supply and register within 29 days, by March 31 (CRA: when to register).

Different for you?

• One person owns the business and the other is paid for work: review Paying family members.
• You expect to leave profit in a corporation or need corporate tax rates: compare Sole proprietorship or corporation and How corporations are taxed.
• You already have a partnership or assets to transfer: read Moving a business into a corporation.
• You have a business loss or are approaching GST/HST registration: see Business losses or When to register for GST/HST.
• Ownership is disputed, contributions are unequal, or contracts expose either owner to substantial debt: gather the planned split, contributions, contracts, province, expected sales and existing registrations for business formation advice.