Converting a Sole Proprietorship to a Corporation Watch Video
Allan Madan, CPA, CA
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Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
Great video and information. Too bad you did not touch on what you do with expenses incurred as the Sole Propriertor and how to handle them in your financials when you incorporate.
Thanks for the info
Hi,
Thanks for your inquiry!
The general overview is that your expenses remain largely unchanged. Two main differences are that for a corporation, you no longer report your revenues and expenses on the 2125 form of your T1 but instead on the T2 and you need to make sure invoices and bills are billed to the corporation and not to the individual. Of course there will always be more more complicated expenses such as life insurance and disability for corporations. If you would like a more in-depth analysis, you can always set up a consultation meeting with us as we would be more than happy to guide you.
– The team at Madan CA
Hello,
Very useful video! What about the business name of the registered name of the sole proprietorship? Is that lost or could it also be transfered to the new corporation?
Best,
Wil
Hi Wil,
To answer your question, yes you may! However, if you want to incorporate federally, you will have to insure that your corporation’s name satisfies its eligibility criteria including ensuring that the same name is not used by another corporation already.
Furthermore, there may be some formality requirements with the Industry Canada including a Consent Letter in which you consent your corporation to use the name of your sole proprietorship.
Thank you,
– Allan and his team
Hi Allan,
I’ve heard there are recent issues about incorporation and being labelled as a personal service business, can you elaborate on this issue, it would be much appreciated.
Hi Charles,
This is an increasing issue for many individuals especially those in the IT field who provide contracting and consulting work to only one company. Please read our article on this issue for more information http://madanca.com/learn/articles/entry/what-you-need-to-do-for-personal-service-business
Best Regards,
Allan Madan and Team
HI Allan,
When converting from a sole proprietorship to a corporation, can I claim costs + fees involved including re-obtaining licenses, permits, accounting fees, new bank accounts?
Hi Thompson,
These fees are all related to your business expense and therefore are tax deductibles.
Best Regards,
Allan Madan and Team
Hi Alan,
Do the business write offs while I was a sole proprietorship apply to my incorporated business?
thanks.
Hi Chrissy,
The best option would be to file two separate business tax returns for each entity, since they are legally two different ones and not simply a continuation of the existing one. You would be able to write off business expenses incurred while operating each entity.
Best Regards,
Allan Madan and Team
Hi Alan,
Are dividends taxes at the same rate for both sole proprietorship’s and incorporated businesses?
Hi Cruz,
You actually can’t pay yourself dividends if you are a sole proprietorship. That’s why incorporating your business is so beneficial because you are allowed to pay dividends which are taxed at lower rates.
Best Regards,
Allan Madan and Team
Hi Allan,
I’ve heard that the lifetime capital gains exemption is increasing, is this true?
Hi J.J.,
Yes this is correct. The LCGE is increasing from $750,000 to $800,000 starting this year. In addition, to ensure that the real value of the LCGE is not eroded over time, Economic Action Plan 2013 proposes to index the $800,000 LCGE limit to inflation for the first time ever. The first indexation adjustment will occur for the 2015 taxation year.
Best Regards,
Allan Madan and Team
I’m interested in how the CRA indexes for inflation, is it in correspondence to the general inflation rate?
Hi Timothy,
While I don’t know the specifications for the indexing, I would generally assume that it would be indexed based on the national inflation rate in Canada.
Best Regards,
Allan Madan and Team
Hi Allan,
How exactly would I go about transferring assets by exchanging shares, can you clarify on this point, thanks.
Hi Lyle,
The process for this would be the same as if you sold property to the corporation in return for cash. The only difference is for your newly incorporated company, you have to structure your shares so that you can issue them in exchange for property. Also the difference between the stock value received and the tax basis in the property transferred to the corporation will result in a gain or loss.
Hi Allan,
What do you recommend as the best share structure to establish when incorporating?
Hi Arielle,
There is no single answer, the best structure would be dependent on a variety of different factors including type of corporation, number of expected owners/shareholders, different liability protections etc. If you could provide me with some more information.
Best Regards,
Allan Madan and Team
I am thinking of selling my business, I need some guidance with regards to how to calculate the good will amount. Is there a certain percentage I am eligible for?
Hi Jason,
Thank you for your question. A simple way to determine the good will is to calculate the fair market value of ALL tangible assets and subtract this value from the sale value of the company. This will give you the value of good will. There is no specific percentage to calculate the goodwill.
Best Regards,
Madanca Team.
Hi Allan,
Do I have to file my personal income in addition to my business income on my T1 Return?
Hi Nate,
You don’t need a separate or different tax return to report your business income. You can report your worldwide total income on the T1 and then if you have several different businesses or employment income etc., it all gets report on the same tax return.
Your business income is reported on the form T2125.
I am a photographer, videographer, and graphic designer. I want to register my business, but I’m not sure if I should do so as a sole proprietorship or a corporation. I am just starting off, so my loss is bigger than my gain. If I register my business, would I be able to write off camera equipment and other business expenses?
Hello Rita.
Based on your situation, I would not recommend incorporating your business right now. Incorporating your business can be costly, both in starting and maintaining it. There is also inherent paperwork that is related to incorporating. However, you can register your business for free. You camera would be considered a capital expense, and would need to be depreciated with capital cost allowance. Depending what you are claiming, your equipment will have a different class and will be depreciable at a different rate. For more information, please visit http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/dprcbl-eng.html
Though the CRA doesn’t expect your business to make money right away, you should have some reasonable expectation of profit in order to claim a loss. Best of luck on your new business. If you have any questions, please don’t hesitate to contact me.
Regards,
Allan Madan and Team
I have a truck that i use for both my sole proprietorship construction business and personal use. I make bi-weekly payments on it.
I am considering incorporating. If i transfer the truck to the corporation can my truck payments be deducted from the corporate account? Thanks
Hi Ray,
In order to deduct the cost of leases and operating expenses in the corporation, the truck must be owned legally by the corporation. The transfer of title may trigger sales tax.
If the corporation obtains title of the truck, then the corporation will be able to deduct its portion of the expenses. Say you use the truck 80% of the time for business purposes, and 20% for person, then you should prorate your total truck expenses 80-20 between the business and you personally. The personal portion is not deductible anywhere.
Hi Allan. Great article here, extremely insightful.
I have a question about transitioning. If there are unpaid accounts still under the sole proprietorship, can it still be closed in order to start the incorporation process? What happens when those invoices get paid eventually?
Merry Christmas,
Thanks,
Jae
Hi Jae,
Thanks for your question. You have two options in dealing with the existing accounts receivable (A/R) and accounts payable (A/P).
1. Transfer the existing A/P and A/R to your newly created corporation, by way of promissory note. Then, have your sole proprietorship continue to pay the outstanding bills, collect the receivables, and remit the net proceeds (difference between collections and bill payments) to your corporation. From a tax and legal perspective, the A/P and A/R belong to the corporation, even though the sole proprietorship is handling the payments. [A section 22 Election should be prepared in respect of the A/R transferred].
2. Do not transfer the existing A/P and A/R to your newly created corporation. The sole proprietorship will collect customer balances owing, and pay bills. From a tax and legal perspective, the A/P and A/R belongs to the sole proprietorship.
Whether you choose option 1 or 2, the sole proprietorship’s bank account must remain active to clear out old balances.
How does the newly formed corp pay for the tangible assets & goodwill of existing Sole Prop.?
For ex. My sole proprietorship is transitioning into a corporation and owns $60k of tangible assets and lets say $40k of goodwill for a total value of $100k. Does the new corporation pay the sole proprietorship $100k? And if so, where do the funds come from if all is owned by the same person? If I am just it just moves over to the new name with no exchange of physical funds, how does one record that on the books of the corp?
Hi Allan,
I am a Canadian left to the Gulf to work there. I do not intend to come back to live in Canada. I do not have any ties in Canada (closed my bank account, have no driving licence, have no home, have no personal belongings, no social ties, …etc). Actually, the only tie I have is my Canadian passport.
Also, my wife (64 years old) did not decide yet whether to come with me or stay with her son (who is 35 years old, lives and works in Canada).
My question is: am I considered none-resident?
What if my wife decided to stay in Canada?
Can I transfer some money every once in a while to her to help her continue living in Canada as she wanted?
Appreciate your response.
Jay
Hi Jay,
Factual resident – It is observed that you have significant social ties to Canada by having your wife in Canada and also willing to support her by sending the money. Hence you need to report income from Canadian and worldwide sources from the day you depart and file tax returns to Canada.
Determining Residency Status: File NR73 Form – to determine residency status
After determining Residency Status: If you are still considered as resident for tax purposes in Canada, the following information will be helpful for you.
You will need to be more specific about the area you are currently living. If you are residing within a country where Canada is already established a tax treaty (such as U.K.) you may be allowed Foreign Tax Credit for the taxes that you paid in the tax treaty country.
Transferring money: Speak to someone at the bank for transferring money earned abroad – Financial entities are required to report electronic funds transfers over a limit.
Residency Status Link: http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rsdncy-eng.html
Best Regards,
Hi Allan, This article was very informative.
I have a question.
I owned a renovation business as sole proprietorship until June 2014. Incorporated in July 2014 and continued my business using the Corporation. I didn’t close my sole proprietorship business HST account yet as I didn’t have enough money to payoff the HST balance at that time. I’ll close the HST account this month and pay the HST balance by April 30th 2015. Right now I am planning to add a friend of mine into the corporation (selling 50% of shares for 50000) .
My question is would I be able to claim the lifetime capital gains exemption as you mentioned above?
I’m handling the book for the sole proprietorship, I want to convert to LLC, how do I make the complete accounting entries for the closing of proprietorship and opening the LLC?
Hi Eric,
LLC’s (limited liability company) are for Americans. If a LLC is used by a Canadian to conduct a business, double tax will result (by IRS and by CRA). A better alternative is to transfer the sole proprietor’s assets (tangible and intangible) to a Canadian corporation pursuant to Section 85 of the Income Tax Act. This way, capital gains tax will not result on the transfer. Double taxation will also be avoided.
Best Regards
Hi, I need to find out what steps are to be taken now that one of my clients has gone from a proprietorship to a LTD. without taking the proper legal steps. He has closed out his sole proprietorship bank account by way of transferring his balance to the LTD new bank
account. He has been collecting the A/R from the proprietorship and depositing it into the LTD bank and also he is paying off his A/P from the proprietorship from his LTD. banks. As far as I know he has not filed a Section 85 as of yet and would it be too late to file one now. Is it not true that one can “Purchase” the business in whole which includes the assets, and liabilities? This is a real mess for me as I do not know how to treat this on the bookkeeping end. I plan on starting a new set of books but I do not know the entries to make in order to bring forward the A/R and the A/P amounts. I hope I have explained this correctly. The only asset he really has in a work truck, and somehow I should put a value on Goodwill and enter that on my start up numbers for the LTD company. Hope you can help. Tks
Hi Allan.
Great article. Lots of information to take in. I just have a question about changing from sole proprietorship incorporated business. I already have an HST number registered for my sole proprietorship, do I need to cancel that number and get a new number for my incorporated business?
Thanks.
Bruce
Me and my husband incorporated the business and he has 100% of voting shares class A and I have 100% of voting class B. I did not transfer anything from his proprietorship yet as I don’t know where to start. We don’t have much assets and most expensive assets like car and some tools were purchased just recently under the old structure. What should be my next step? Can I issue more shares in exchange for the assets and put some cash in thee corporation in exchange for the promissory note? How do I do it so we don’t get hit with the taxes? Thanks!
Hi Anna,
Thanks for your question. For assets that have declined in value since your husband bought them (e.g. office furniture, equipment, computers, etc.), he can transfer those assets to his newly formed corporation in exchange for a promissory note. The exchange amount (i.e. selling price) should be equal to the market value of the assets on the date of transfer.
For assets that have gone up in value (e.g. goodwill or customer list), they should be transferred to the corporation pursuant to Section 85 of the income tax act. This can be accomplished by completing form T2057 along with a transfer agreement, which my office can prepare. Otherwise, capital gains tax will result on the transfer.
I am renting a resaurant location ,I am not sure if it is the best to have opened corperate business account or as right now the business is sole.I did so much expenses for renovation and equipment for that location about 80.000$. Basically the question is if it is better for restaurant to have corporate or sole.I am reading all the question and your answers,in some point I do not understand at all. Please help and reply.
Hi Heda,
Thanks for your question. You can protect your personal assets from being exposed in a business lawsuit if you are incorporated. With a sole proprietorship, your personal assets are at risk of loss.
Additionally, corporation’s pay a low tax rate on business profits (15% in the Province of Ontario on business profits up to $500,000).
HI, I have a question similar to Anna’s. I changed from a sole proprietorship to a corporation. How and when should I use a promissory note for transferring some home office furniture and a computer. Or is it easier to just include remaining values as a capital gain from the old business? There is no other goodwill.
Thanks
Hi Phil,
You are supposed to sell your sole proprietorship’s assets at their current market value to your corporation. Since furniture and computers don’t appreciate in value, it’s fair to assume that their current market value is equal to their Undepreciated Capital Cost (UCC). For example, assume that the UCC of your computer is $500 and the UCC of your furniture is $750. To avoid a recapture of previously claimed CCA, consider selling the computer and furniture to your corporation in exchange for two promissory notes for $500 to $750 respectively.
Hi,
Thanks for the info. It was very informative. I’ve registered my business as a Sole Proprietorship. I’m doing this all on my own and I found out after that I cannot register a trade name unless I’m incorporated. I still plan to keep my sole proprietorship now, but when time comes and I want to incorporate, will I lose my business name?? or can I transfer and use the same business name for my corporation and finally register a trade name?
Please help! What other options do I have ?
Thanks for your question Yzabelle,
You can register a trade name for a sole proprietorship with the Ministry of Government Services in your province. If you incorporate a company, you can have the same name for your company as you had for your sole proprietorship, so long as nobody else has taken it.
Great video Alan. Curious about a case where converting a sole prop into a newly formed corporation, the owner transfers assets like laptop, inventory & equipment to a corp. However, assets were never capitalized (so no CCA claims) or written off while self-employed. Fair value of the assets is say $5K, is a section 85 rollover required in this case (no real gain to defer), with shares being issued, or would you just record this transaction through a shareholder loan? Thanks!
Hi Matt,
You can transfer these assets outside of Section 85 because there is no taxable capital gain to defer. Record a shareholder payable for $5,000 and assets for $5,000 on the company’s financial statements.
I have a situation where old Corp is transferring assets to a newly formed Corp. The owner of both Corps is same and therefore related. I elect under 85 to rollover Automobiles from Old Corp to New one at UCC.
Where should I show the transfers on the T2 return of old Corp? When UCC is booked in the new Corp, how it will recapture CCA when sold in the future?
Thanks
Hi Abdus,
Record the proceeds of disposition on Schedule 8 of the transferor corporation. Record the acquisition cost on Schedule 8 of the receiving corporation. In both cases, the transfer price is equal to the UCC. Also complete Schedule 11. When the receiving corporation eventually sells the property, either a terminal loss (selling price less than UCC) or recapture (selling price more than UCC) will be recognized.
Hi Allan,
Would transferring a partnership to a corporation (owned by the same two) be the same as from sole proprietorship to corporation?
Also, to take advantage of home office and car use deductions, is it possible that after such transfer, I establish a separate sole proprietor entity and have the corporation contract its CEO/Director position to my SP company?
Thanks for the immensely helpful article.
Hi Ivan,
The tax free-rollover rules for a sole proprietorship are very similar to those for a partnership. In both cases, assets can be transferred on a tax-free basis to a corporation.
Do not create a sole proprietorship for the purpose of taking advantage of car and home office deductions. The payments made by the corporation to your sole proprietorship will likely be considered as employment income. Instead, charge back your home office expenses to your corporation, and consider receiving a tax-free vehicle allowance from your corporation.
“Hi,
I operated a sole proprietorship which incurred a loss since its inception. I have closed the sole proprietorship
business and transferred it to a company(ltd) offering the same services. What do I do with the loss that was being carried forward since opening? Please advise.
Thank you
“
Hi Harmony,
”
You can carry-forward the losses for up to 20 tax years and offset those losses against personal income you earn.”
Hi,
I registered my business name under sole proprietorship about 2 weeks ago, and have not done anything (no business number, cra accounts, sales, profit, bank accounts, etc). I have just decided to incorporate the business. I cancelled the masters business license today and plan to incorporate this coming week. Do I have to do any tax filing in January for the 2-week period of having the masters business license eventhough nothing happened after registering the business name? If so, what do I have to file since there’s no seperate accounts? Also, when incorporating, the name that I just cancelled today is showing up on the NUANS report. I plan to use the same name when I incorporate. Does it matter if its still showing up on the report since its my own? Thanks a lot!
Hi Christine,
You should complete form T2125, Statement of Business Activities, and attach this form with your personal tax return. On this form, indicate the start date and end date of the business.
You can register a corporation with the same name as your sole proprietorship. Please let me know if you need my assistance with incorporating and preparing a corporate minute book.
Hi Allan,
Great article! I am in a very unique situation. I would really appreciate your comments on it. I moved from USA to Canada in August 2016. I am not a US citizen or Greencard holder though, was in USA on H-1B work visa. I am a Canadian permanent resident now and live in Vancouver, British Columbia. I am planning to start my business on Amazon USA website selling physical products and purchase products from suppliers in USA using my US credit cards only as I will be part of double exchange rate if I use my Canadian credit cards. Per my research online I came to know that starting off as a corporation right away will provide liability protection but I will be paying lot more in business filing fees so I am thinking to start off a Sole Proprietorship for now. Below are my 2 questions with regards to this scenario:
(1)How much revenue should I be making (more than USD $10,000 per month?) in order to justify Incorporating in BC rather operating as a sole proprietorship?
(2) If I operate as a sole proprietorship,lets say, from January 10,2017 to June 1,2017 and then incorporate from June 1,2017 to December 1,2017 then will it be a lot of work and hassle to file 2 different tax returns to CRA by February 2018 per the norm?
(3) If I am selling,lets say, 1 product in each category (Home,Kitchen and Pet Food products) of Amazon USA website as a Sole Proprietorship from January 10,2017 to June 1,2017 and based on the high monthly revenue decide to incorporate in BC, then do I have to go through the whole process of getting EIN from IRS again and re-branding as a Corporation on Amazon USA website or can I still keep the brand name I used as a Sole Proprietorship? Is it recommend that I incorporate right away to save myself from tax headaches and liability protection in future?
I would really appreciate your comments! Thank you!
Hi Sanjay,
1) You should incorporate your business when you are making more money than you need to pay for your business and personal expenses. In other words, incorporating a business makes sense when you have the ability to save your earnings and not spend it all. The money saved within a corporate bank account is NOT subject to personal taxation.
2) It will be a bit more work if you incorporate your business midway through the year. But it’s doable.
3) A corporation must have a separate legal name and EIN. Incorporating now will save you time since you only have to register once.
Thanks for this very informative article Alan. For the subsequent years after the rollover has been completed, can the goodwill be amortized using the appropriate CCA class (#14)? If yes, since amortization reduces income tax payable, and the estimate for goodwill at acquisition CAN vary considerably (depending on the method used for the estimate), isn’t that an incentive to value the goodwill as high as possible in order to increase the amount of amortization, and therefore, reduce the income tax payable?
Thanks for what you do
Hi Olivieri,
Great question. Goodwill is transferred at cost. Since most goodwill is internally generated, the cost amount is $0. On form T2057 you cannot elect to transfer an asset at zero, so you should elect for $1. Only the cost amount can be amortized. Therefore, it doesn’t matter what the market value is.
Hi Allan,
I have a quick question. I am planning to Incorporate in Canada for my E-commerce business. My business model is basically importing private label products from overseas to Amazon USA warehouses for sale on Amazon US website. After my Incorporation process is completed, I am planning to open a business checking account with RBC bank in Canada.RBC bank also offers personal checking accounts in USA through their US branch in state of Georgia which I am planning to take advantage of to receive profits from Amazon in US dollars in my RBC US bank account.I am then planning to pay myself a salary in Canadian Dollars by transferring profits from my RBC personal checking account in USA to my RBC business banking account in Canada every month. The reason I do not want to receive profits from Amazon to my RBC business banking account here in Canada is because the currency exchange rate Amazon offers is horrible for USD-to-CAD or even USD-to-USD transfer of profits from sales from Amazon to my bank accounts here in Canada. In this case, will I face any issues from CRA tax-wise by them saying why am I using personal checking accounts in USA to receive profits from Amazon and depositing it in my Corporate business checking account in Canada? If this is going to be an issue, what according to you is the best alternative in my case?
Hi Sanj,
This is going to be an issue. You cannot deposit company sales into a personal bank account. This could be viewed as a taxable shareholder loan / personal income by the CRA.
Consider opening up a C-corporation in the US with a US corporate bank account. The C-corporation can act as a collections agent on behalf of the Canadian company. The C-corporation can then transfer US dollars from its bank account to a US dollar account (at a Canadian bank) belonging to your Canadian corporation.
Hi Allan, this is great video. Thank you. Just one question, what happen if I would like to transfer my office building to my corporation with the mortgage together. Is it possible to do under Sec 85?
Thank you,
Cindy
Cindy,
Yes, it’s possible to do this pursuant to Section 85 of the Income Tax Act. Make sure to get approval from the mortgage lender first.
Thank you for the article. If I am incorporating from a sole proprietorship, is the easiest way to transfer the assets (equipment and vehicle) at the UCC balance at the date the incorporation was made (only claimed CCA on the 8 of 12 months of the year that was still a prop.) on the T2 and then make an adjustment to the books DR assets (for the price they were paid for in the sole prop.) and CR the shareholder loan account? By doing it this way, am I not avoiding having to do a section 85 rollover?
Hi Kristina,
You are supposed to transfer assets at their fair market value, not UCC. The purpose of Section 85 is to allow you to transfer assets at their cost (e.g. UCC for depreciating assets, and purchase price for other assets) as to avoid recapture and/or a capital gain .
In practice, you can make the assumption that UCC = FMV if the value of the depreciating assets is not significant. You are also forgetting the biggest asset that you have – Goodwill, which should be transferred pursuant to Section 85.
The journal entries you indicated in your question are correct.
Hi Alan,
1. Question regarding setting up a bank account.
I currently have a US bank account here in Canada at BMO but it is a personal account not a business bank account.
In order to charge clients I’ve been using stripe.com to collect payments from the US companies I’m sending leads to. I have linked stripe to my by personal BMO USD bank account to charge customers from stripe and transfer those payments into my USD account. So far it’s working fine.
I’ve only just started and don’t yet have a company name.
Once I form my business can I just continue like I have been above? I imagine it’s ok for sole proprietorship.
If I incorporate, do I have to open up a separate USD business bank account with new company name to receive payments in US funds?
2. About what you wrote to Sanj, USD bank account and C-corporation in USA.
I’m referencing your comment to Sanj.
Above you wrote to Sanj ” Consider opening up a C-corporation in the US with a US corporate bank account. The C-corporation can act as a collections agent on behalf of the Canadian company. The C-corporation can then transfer US dollars from its bank account to a US dollar account (at a Canadian bank) belonging to your Canadian corporation.
If I want to open up a USD business bank account with RBC Georgia as Sanj did. Would it be necessary to open up a C-corporation or S Corp in the US as you mentioned here to Sanj? Why wouldn’t we just open a USD business bank account in the US through RBC through their US branch in state of Georgia. and use it to transfer funds to the USD business bank account in Canada?
3. Do I need an EIN Number? Why? And if so, how would I get this?
Thank you for taking the time to help people here.
Hi Jason,
Thank you for your questions. My responses are as follows:
1. Open up a separate USD business bank account with your new company name to receive payments in US funds. You can no longer use your personal account to receive payments.
2. If you are able to open a USD business bank account for your Canadian corporation in the US through RBC, then this is a good option. However, RBC may not allow this. Please check with them.
3. Yes, your company should obtain an EIN if it is selling to the US.
Hi Allan,
I’m about to launch a line of hair extensions and lashes as a sole proprietorship business. Since I’m selling products, a friend mentioned to me that I should incorporate now to limit my liability in the event a customer tried to sue me. If I’m selling products, do you recommend I incorporate right away or is it okay for me to wait till my business grows and then incorporate? Do I have any other options to limit my liability aside from incorporation?
Much thanks!
Hi, Amy. The benefit of incorporating now is that you will limit your liability because of the liability protection that a corporation provides to its shareholders. The disadvantage is that the setup of a corporation and maintenance is expensive compared to operating as a sole proprietor. Consider purchasing liability insurance, especially if you plan on operating as a sole proprietor.
Hello Allan!
Thank you for this great article.
I have a quetion, what is the way to transfer cash from sole proprietor to corporation, so only corporation will pay taxes on this amount?
Thank you!
Hi Vasya, if you transfer cash from your sole proprietorship to a corporation, you will pay personal income tax on the amount transferred.
Well done, comprehensive, and factual. Thank you.
Thank you!
I am starting out as sole proprietor shortly with Business name as my name to avoid opening another bank account. Just wondering if I can open one more business as corporation additionally as some point In future instead of converting existing sole proprietorship business ?
Hi Gopal,
If you setup a corporation in the future to carry on the same business as your sole proprietorship with the same clients, then you have ‘transferred’ the business of your sole proprietorship to your new corporation. This transfer can result in capital gains tax, especially if your sole proprietorship was profitable prior to the transfer.
Is the following doable and legal ?
1) I will start as sole proprietor with just one client for my current contact
2) After 6 months (or when the current contract ends), I will close the Sole proprietorship business. I will account for the money received in my personal business income and pay taxes accordingly.
3) I will open a Corporation business account and have the same client (as with Sole prop earlier).
Effectively I am assuming I have to close Sole prop business account prior to opening Corporation business account
The reason I am asking this question is – I have a contract job and I want to keep it simple to start with. If and Only if I get another extension or another contract job, I will create a Corporation.
Appreciate your inputs. Sorry I am a newbie
Regards,
Gopal
Thank you for your question. If you open a new corporation to carry on the same business as your sole proprietorship with the same client(s), then this will be considered a ‘transfer’ of the business. As such, capital gains tax will become payable upon the transfer.
To avoid the payment of capital gains tax, consider transferring the sole proprietorship’s client list and business to your new corporation under section 85 of the income tax act. To accomplish this, a section 85 agreement and form T2057 need to be prepared and filed.
When should I do the rollover assets and goodwill? can I do this during tax or have to do at the beginning?
Hi Mohammed,
You can transfer the assets of your sole proprietorship, including goodwill, to a corporation at any time in the year. The transfer should be completed pursuant to Section 85 of the Canadian Income Tax Act in order to avoid triggering capital gains tax.
hello i am a partnership with the wife and we have a credit card and loc and bank as a partnership but we want to transfer everything over to a c operation as we want to now interoperate is this possible or are we hooped
Hi Jordan,
You and your spouse can transfer the assets of your partnership to a newly incorporated company that you jointly own. I recommend that you make the the transfer pursuant to Section 85 of the income tax act in order to avoid triggering a capital gain.
Hello there , just wondering right now my husband and I own a few rentals, I would like to put in a corporations…my question is we had filed a capital gain exemption in 1994 does that get transferred to the corporation or it is lost and we start over at the FMV of today if you can e mail me would be great thanks
Theresa
Hi Theresa,
You will not lose the capital gains exemption of $100,000 by transferring properties to a Canadian corporation. However, I still recommend that you rollover the properties pursuant to Section 85 of the income tax act to your corporation in order to avoid triggering a capital gain upon the transfer.
Hello
I registered a Sole Prop. business, a couple of days back. After registering I realized that I should have done it as a a corp.
Please let me know as to how can I now change it to an “Inc.” entity.
Thanks
Hi Romesh,
Rather than converting your new sole proprietorship into a corporation, I suggest that you start a fresh corporation. This will be a more cost-effective approach. We can incorporate a Canadian company for you for a fee of $918 + tax. This includes (a) articles of incorporation, (b) all government fees and name search fees, (c) corporate minute book + seal.
Allan,
Thank you for the valuable online resource.
I have a situation where my proprietorship was recently created and has no revenue, liabilities or assets.
Due to a change in liability risk, I want to run the business as an incorporated business with the same name. Can you simply just close the associated accounts with the proprietorship, and incorporate a business with the same name?
As there are no assets, I assume no forms from section 85 are needed?
Hi Chris,
Yes, you can close the proprietorship accounts and open a corporation with the same name (so long as the name is available). A section 85 rollover agreement is not required, because the business has no value and no assets.
Great read!
How does it work if you have a small commercial real estate under a corporation and would like to transfer or sell it to yourself as a sole proprietor? I am one of the directors within the corporation.
Hi Krash,
The corporation will have to sell the property at its market value (as determined by a third party appraiser) to you. This could trigger a capital gain for the corporation if the property has increased in value. In addition, the corporation must include in its income any Capital Cost Allowance claimed in the years preceding the year of sale. Lastly, you, as the purchaser, will have to pay the Land Transfer Tax.
Hi Allan and Team,
Great Vid – thanks!
If in the middle of incorporating, I received product ordered under the Sole Prop, and sold a few items before the incorporation was registered, should I “split” the invoice in two, with “1/2” profit/loss recorded in the Sole Prop and the remainder in the LLC?
Hi Allen,
If you sold products prior to the incorporation date, then the profit made on those sales will be taxed to you personally as a sole proprietor. In addition, you should sell the unsold inventory that you own as a sole proprietor to your new corporation at cost (i.e. without a mark-up). Any future sales should be made by the corporation so that the corporation can record the profit made on those sales.
Hi there,
Thank you for the information!
If someone was a sole-prop (service provider) for a period of 3 months only and then incorporated, is it still necessary to do section 85? there are no real assets except for some minor equipment (i.e.: laptop). The sales and expenses were also pretty low (less than 15K).
Thanks,
ML
Hi Mich,
In this particular case, I don’t see the need for a Section 85 rollover.