How to Start a Business in Ottawa

The Personal Services Business rules under the Income Tax Act are the single most important tax concept for Ottawa's incorporated professionals to understand. A corporation is a PSB in a given year if an individual who performs services on behalf of the corporation — an "incorporated employee" — would reasonably be regarded as an officer or employee of the entity to which the services are provided, if the corporation did not exist. The key factors CRA examines are: (1) Does the client control how the work is performed, not just the outcome? (2) Does the incorporated individual work exclusively or primarily for one client? (3) Does the individual supply their own tools and equipment? (4) Is the individual integrated into the client's organisation — attending internal meetings, using client email addresses, reporting to client management? (5) Does the individual bear genuine financial risk of profit or loss? If the answer to most of these questions points toward employment, CRA may characterise the corporation as a PSB — stripping the SBD and most operating deductions. The PSB rate in Ontario is approximately 44.5%. Structure your contracts and working arrangements to demonstrate genuine business independence before you begin, not after CRA has opened a review.

Federal government departments and Crown corporations are registered for GST/HST and recover ITCs on all taxable purchases — meaning you should charge HST on every invoice to a federal client once you are registered. The applicable rate is determined by where the service is performed or where the client is located. Services performed in Ontario for a federal client are subject to 13% Ontario HST. However, many Ottawa consultants provide services to federal departments that have offices across multiple provinces — in some cases, the correct rate depends on where the specific service recipient is located, not where the department's head office is. Configure your accounting software to track place of supply by the specific federal department and location for each engagement. For services to Gatineau-based federal agencies, the applicable rate may be 5% GST rather than 13% HST — the distinction between Ontario and Quebec as the place of supply matters.

Ottawa CCPC owners operating as active businesses (not PSBs) can deduct all reasonable expenses incurred to earn corporate income — office rent or home office, computer equipment and software, professional development and security clearance costs, vehicle expenses with mileage logbook, professional association fees, business insurance, legal and accounting fees, and advertising and marketing. A critically important distinction: PSB corporations can deduct only what an employee would be entitled to deduct on a T2200 — primarily employment expenses. Active business corporations deduct the full range of business expenses. The gap in deductible expenses between an active business and a PSB in a given year can exceed $30,000 for a typical Ottawa consultant — compounding the tax rate difference into a combined tax burden that is materially higher. Your CPA confirms which deductions apply to your Ottawa corporation's classification each year.

For Ottawa incorporated consultants, the salary vs. dividend decision has an additional dimension that does not apply in most other industries: the interaction between your compensation structure and your PSB risk profile. An Ottawa consultant who pays no salary and receives only dividends has a weaker case for business independence — since employees receive salaries and the absence of salary makes the corporation's financial structure look more like a pass-through for personal income than a genuine business. Paying at least some salary — even a modest amount — alongside dividends strengthens the active business documentation and generates RRSP room. Use our free Salary vs. Dividend Calculator to model the tax comparison, then discuss the PSB documentation implications with your CPA before deciding on your compensation structure.

Ottawa business owners who operate multiple corporations — an operating company and a holding company — frequently use management fees to transfer income between entities. Management fees paid by an operating company to a related holding company are deductible to the operating company and taxable to the holding company — shifting income to a lower-tax entity or deferring personal tax until dividends are ultimately paid. CRA scrutinises management fees between related Ottawa corporations closely. For a management fee to be deductible, it must be reasonable in amount, documented by a written management services agreement, and supported by evidence that actual management services were performed. A management fee that is simply a round-number transfer with no supporting services provided will be disallowed on audit. Gondaliya CPA structures management fee arrangements for Ottawa clients with written agreements, defined services and appropriate supporting documentation.

Beyond CRA registration, Ottawa businesses face a unique set of regulatory requirements tied to federal government proximity. Many federal contracts require a personnel security clearance at the Reliability, Secret or Top Secret level — issued through the Contract Security Program administered by Public Services and Procurement Canada. Security clearances are issued to individuals and to the corporation — both require separate applications and processing times of 3 to 18 months depending on level. Starting the clearance application process in parallel with incorporation — rather than waiting until a contract is awarded — prevents the 3 to 6 month delay that stops Ottawa businesses from performing on awarded contracts while clearances are processed. City of Ottawa business licences are required for specific business categories through Ottawa By-law and Regulatory Services — separate from federal clearances and CRA registration.