Canada Mortgage Professionals Exam 2025 – 400 Free Practice Questions to Pass the Exam

A sole proprietorship operates fundamentally as an extension of the individual owner, meaning there is no legal distinction between the business and the owner. As a result, the profits generated by the sole proprietorship are not taxed at the business level, as a corporation would be. Instead, these profits are reported directly on the owner's personal income tax return, which means that all income generated by the business is taxed as part of the owner’s overall income using the personal tax rates.

This structure allows for simplicity in tax filing as the income is combined with any other personal income the owner may have, which can be advantageous. It avoids the double taxation that corporate entities often face, where income is taxed first at the corporate level and then again when distributed to shareholders.

In contrast, other options describe entities such as corporations, which are considered separate taxable entities, requiring different tax treatment from their owners. A sole proprietorship does not function in this manner, reinforcing the importance of understanding that profits flow directly through to the owner’s tax return. This connection between business income and personal taxation is a fundamental characteristic of sole proprietorships.