A sole proprietorship is not a separate legal entity from its owner. Business income and losses flow directly onto the owner's personal T1 through Form T2125, Statement of Business or Professional Activities. There's no corporate veil — the owner carries unlimited personal liability for the business's debts, and there's exactly one tax filing that captures the whole picture: the owner's own T1.
A corporation is a separate legal person. It earns its own income, pays its own corporate tax, and files its own T2 Corporation Income Tax Return every year. The owner — now a shareholder, and often also an employee or director — only personally receives whatever the corporation actually pays out to them: salary, dividends, or, less formally, a shareholder loan (Module 08). Everything the corporation earns but doesn't pay out simply accumulates inside the company as retained earnings.
A sole proprietor's T1 and NOA already show, in a single number, essentially what the underwriter needs — adjusted for add-backs and gross-ups in Modules 04 and 05. An incorporated owner's T1 and NOA show only what they chose to pay themselves, which might be a fraction of what the corporation actually generated, or, less commonly, could even be more than the business can sustainably support. Reading only the personal side of an incorporated file is reading half the story.
A partnership is taxed similarly to a sole proprietorship — income flows through to each partner's personal return, typically via a version of Form T2125 completed per partner — but ownership percentage becomes relevant immediately, since a partnership's total results have to be split among its partners before any individual's income can be established. This gets its full treatment in the closing module of this course, on ownership-percentage proration.
Ask about legal structure on day one, not industry. Two clients who both describe themselves as running a landscaping business, or a mortgage brokerage, or a consulting practice, can be a sole proprietor and an incorporated owner respectively — and from that point forward, the entire document request, the entire read of the T1, and the entire treatment of the numbers diverges completely between them.
Two clients both describe themselves as running a plumbing business. One is a sole proprietor; the other is incorporated. What is the single most important consequence of that difference for underwriting their files?
The legal structure — not the industry — determines what documents exist and what any single document actually proves. A sole proprietor's business result is baked into their own T1 every year; an incorporated owner's personal T1 is only ever a slice of the business's real results, which is exactly why the corporation's own T2 and financial statements have to be pulled in separately. Assuming identical treatment because the industry is the same, or assuming one structure is inherently riskier or more document-heavy than the other, both miss the actual driver of the difference.
