Keeping your business money apart from your personal money is the single cheapest thing you can do to make tax, GST/HST, and a CRA review painless. For a sole proprietor it is not strictly required by law if you trade under your own name, but it is strongly advised. For a corporation it is mandatory, because the company is a separate legal person and mixing its money with yours can cost you the liability protection you incorporated for. Either way, the discipline is the same: a separate account, a separate card, and a clean record of any money that crosses between you and the business.
Sole proprietor: advised, not strictly required
A sole proprietorship is not a separate legal entity, so you and the business are the same taxpayer and there is no federal law forcing a separate account if you operate under your own legal name. But "allowed" is not "wise." The moment your personal and business transactions share an account, every expense claim becomes arguable and every input tax credit harder to prove. Two things push a sole prop firmly into a separate account: trading under any name other than your own (you need a business account to deposit cheques made out to that name), and registering for GST/HST once you cross the $30,000 small-supplier threshold. The mechanics of opening one are in Business Banking for Trades.
Corporation: a hard line you cannot blur
A corporation must bank in its own name. Running corporate money through your personal account, or paying personal bills straight from the company account, risks "piercing the corporate veil," which can strip the very liability shield incorporation was meant to give you. With a corporation, money does not simply belong to you because you own the company. You take it out through a salary or a dividend, each recorded properly. If you are weighing the structure, see Incorporation vs Sole Proprietor: The Complete Guide.
The simple setup that works
You do not need anything elaborate:
- A dedicated business chequing account. All business income in, all business expenses out.
- A business credit or debit card. Use it for every business purchase so the statement is a ready-made expense list.
- A separate savings account for the GST/HST and income tax you are holding, so it is never accidentally spent (see Managing Cash Flow).
- One clear method for paying yourself. A sole prop draws funds; a corporation pays a salary or dividend. Record the transfer either way.
Pay yourself deliberately
Money that moves between you and the business should be a labelled transaction, not a blur. For a sole proprietor, a draw (an "owner's draw") is simply you taking money out; it is not a tax-deductible expense, and your tax is on the business profit regardless of what you drew. For a corporation, you pay yourself a salary (which runs through payroll with source deductions, see Payroll, CPP, EI and Source Deductions) or a dividend, and each is treated differently for tax. Whatever the method, make it a clean, recorded transfer between the two accounts so your books show exactly what came out and why.
Why it matters at audit
If the CRA reviews you, separate accounts turn a stressful exercise into a paperwork one. Your business statements line up with your books, your input tax credits trace to business purchases, and there is no need to argue that the supermarket run was really job materials. Mixed accounts invite exactly the scrutiny, and the disallowed claims, you want to avoid. The clean split also makes your bookkeeping faster all year (see Bookkeeping Basics for Trades).
Common mistakes
- Paying personal bills from the business account "just this once." It becomes a habit and muddies every claim. For a corporation it is genuinely dangerous.
- Treating a sole prop draw as an expense. A draw is not deductible; your tax is on profit, not on what you left in the account.
- One card for everything. Separate cards make the statement do your bookkeeping for you.
- Not parking the tax separately. GST/HST and income tax you are holding are not your spending money.
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