Incorporation Costs: Deducting the Lawyer's Invoice in Canada

Can my new corporation deduct the lawyer's incorporation invoice?

Up to $3,000 in total for the incorporation of one corporation, to the extent the cost is the corporation's own and not otherwise deductible. That is paragraph 20(1)(b) of the Income Tax Act, claimed on line 418 of T2 Schedule 1.

These make a case not simple:

• Your lawyer's bill is over $3,000: the part above it is not deducted under this paragraph (see below).
• You, a partner or an earlier business paid or deducted part of the cost, especially before the corporation existed.
• The invoice mixes incorporation work with share issue, contracts or other advice, and neither the Act nor the current CRA pages cited here list which items count. An archived CRA bulletin does (see below).
• The corporation earns personal services business income (an incorporated worker who would otherwise be the client's employee). Paragraph 18(1)(p) of the Act denies such a corporation any expense incurred to earn that income unless it is on a short list, and incorporation costs are not on it (CRA). Section 20(1) overrides paragraphs 18(1)(a), (b) and (h), not (p), so whether this deduction survives needs a professional's read; see personal services business.
• The first T2 is due and these points are still open.

Gather the itemized lawyer's invoice with each service on its own line and any sales tax shown separately, the name the invoice is addressed to, the incorporation date and first year-end, proof of who paid and from which account, and any return where someone already deducted part of it.

What is the incorporation expense limit, and does it apply per corporation or per year?

The limit is $3,000 for the incorporation of one corporation, reduced by what other taxpayers deducted for it. Paragraph 20(1)(b) allows the lesser of two amounts: the incorporation expense incurred in the year that is not otherwise deductible, and $3,000 less the total of all amounts deducted by another taxpayer for the incorporation of the corporation (Income Tax Act, section 20). Finance Canada's notes call it up to $3,000 per corporation (Finance Canada).

Two points neither source settles:

• A later year. The formula subtracts only amounts deducted by "another taxpayer". It does not say how the limit works if the same corporation incurs more incorporation costs in a later year.
• No business started yet. The paragraph deducts in computing income from a business or property. The CRA says that to deduct a business expense you need to have carried on the business in the fiscal period in which the expense was incurred (CRA: business expenses). That page does not mention paragraph 20(1)(b), so how the paragraph applies before the business starts is not settled in the sources cited. When a business starts, and how a start-up loss is used, is covered in startup costs before your first sale.

Settle both before the first T2 is filed.

Which costs count as incorporation expenses?

The Act says only "an expense incurred in the year for the incorporation of a corporation". It lists no items. CRA's archived bulletin, written for the old eligible capital rules, gave this test: expenses necessarily incurred by the incorporators to bring a corporation into existence, including (IT-143R3):

• fees required by the federal or provincial government to incorporate;
• lawyer's fees, including preparing the articles of incorporation and by-laws;
• accountant's fees tied to the incorporation;
• affidavit costs, advertising costs where applicants must give notice of their intention to apply for a charter, and the cost of attending the preliminary meetings.

Treat that as a starting point, not the current rule: the bulletin is archived and was written for a different regime. A name search, minute book or seal is not on its list. Ask the lawyer to split the invoice line by line.

What about the part of the lawyer's bill above the limit?

The part over $3,000 is not deducted under paragraph 20(1)(b). Finance Canada's 2016 notes say it is included in Class 14.1 (Finance Canada), which earns capital cost allowance, a yearly write-off of 5% of the remaining balance (CRA: classes of depreciable property).

The notes name no provision that does this. The closest in the Act is the goodwill rule for capital outlays (subsection 13(35)). It applies to a business carried on, and only if no portion of the outlay is the cost of a property or deductible in computing business income. Because part of the invoice may be deductible under paragraph 20(1)(b), whether the excess meets that condition is not settled in the sources cited.

Finance Canada's notes treat the excess as capital, and the Act denies a deduction for a capital outlay unless it expressly permits one (section 18(1)(b)). Whether any invoice line is an ordinary business cost instead needs a professional's read of the invoice. For classes, rates and first-year rules, see capital cost allowance.

Which costs follow different rules: share issue costs, ongoing legal advice, contracts?

Not every line on a lawyer's invoice is an incorporation expense. Each of these follows its own rule.

The archived IT-341R4 says incorporation expenses are not share issue expenses, so the invoice should show them apart, and that the undeducted part of a share issue expense cannot be carried forward. The CRA's business-expenses page is written for self-employed businesses; the Act's income-earning test applies to a corporation too.

Can the corporation claim costs I paid personally before it existed?

Not automatically. Paragraph 20(1)(b) deducts an expense incurred for the incorporation in computing a taxpayer's income, so the first question is whose expense it was (Income Tax Act, section 20). Section 20(1) applies despite the Act's income-earning test in paragraph 18(1)(a), so that test is not the issue here.

A corporation does not exist in law before its incorporation date. Under section 14 of the Canada Business Corporations Act, a person who signs a contract in a federal corporation's name before it exists is personally bound by it until the corporation adopts it, within a reasonable time after it comes into existence, by action or conduct showing it intends to be bound. On adoption the signer stops being bound. CRA's archived IT-454 says certain provincial acts, including those of Ontario, Manitoba and Saskatchewan, also allow adoption, and that costs the promoter incurred should be reimbursed.

Where no such act applies, IT-454 says the CRA will normally accept the corporation's accounting for earlier transactions if all of these are met:

• the facts clearly show those who authorize the transactions intend a corporation to carry on the business;
• the gap between starting and incorporating is relatively short, or the parties did not cause a longer one;
• no one disputes who accounts for the transactions;
• the effect on the parties' combined tax is negligible;
• the corporation adopts any written contract made in its name before it existed.

It will not accept the accounting when the proprietor or partners of an existing business incorporate it, unless the business was newly acquired, and it warns taxpayers not to assume acceptance.

The bulletin is archived, covers business transactions rather than incorporation fees, and does not say whether a reimbursement alone makes the cost the corporation's; this guide does not check the provincial statutes it names. So a founder's cost may stay the founder's unless the corporation took on the arrangement; a professional settles which before the first T2.

These facts matter:

• whose name is on the invoice and who was liable for it;
• whether the corporation adopted the arrangement or agreed to repay;
• the invoice date against the incorporation date;
• whether anyone else deducted the cost.

To repay a founder, see business expenses paid personally. For costs before the first sale, see startup costs before your first sale.

What if I or someone else already deducted some of these costs?

Every amount another taxpayer deducted for the same incorporation reduces the corporation's room (paragraph 20(1)(b)): a founder, a partner, or a sole proprietorship that claimed part of the cost on its own return.

Before the first T2 is filed, list each return that claimed any of the cost, the amount and the year. Whether an earlier return needs to change is for a professional to decide. The corporation's claim is at most the $3,000 limit less those amounts, and no more than the incorporation expense it incurred.

How do I book the cost in the first-year books and report it on the T2?

The books follow the invoice. The tax claim is worked out separately on Schedule 1, which reconciles the financial statements to net income for tax (CRA: T2 guide).

1. Record the invoice split by service, with sales tax on its own line. Reduce the expense by any GST/HST you claim as an input tax credit (CRA: business expenses; Income Tax Act, section 248); see filing GST/HST and input tax credits. Keep the invoice date and the incorporation date on the file, and keep the invoice and the bank records that show payment for a minimum of six years from the end of the last tax year they relate to (CRA: business records).
2. Record who paid and from which account. If a founder paid and the corporation will repay, see shareholder loan account.
3. Deduct at line 418 on Schedule 1. Book income is the starting point, and line 418 is on the deduct side. If the books already expensed the invoice, that expense has already reduced book income, so the Schedule 1 entries must leave the cost deducted once in total. The add side has lines for capital items expensed (206), non-deductible legal and accounting fees (228) and share issue expense (235); which entries fit is the preparer's call (Schedule 1 form).
4. Track any amount treated as Class 14.1 on Schedule 8, which calculates corporate capital cost allowance.
5. File the T2 within six months after the tax year ends. A corporation files for every tax year even if no tax is payable, and inactive corporations are included (CRA: who has to file).

For the rest of the first-year setup, see books for a new CCPC.

Does my province change the answer?

Paragraph 20(1)(b) is a federal rule. The CRA administers provincial and territorial corporation income tax for every province and territory except Quebec and Alberta (CRA: provincial and territorial corporation tax). This guide does not cover how provincial or territorial tax treats incorporation costs, or how Quebec and Alberta do.

Example

All amounts are Canadian dollars and illustrative. Each stated cost is net of any GST/HST recovered as an input tax credit.

Costs under the limit

A new Ontario corporation pays C$2,400 of legal and filing costs to incorporate. The whole C$2,400 is under the C$3,000 limit. If every item is an incorporation expense, the cost is the corporation's own, no one else has deducted any of it and no other rule applies, the corporation may be able to claim up to C$2,400 on line 418 of its first T2.

Invoice above the limit

Assume every line of a C$4,200 lawyer's incorporation invoice is an incorporation expense and no one else deducted any of it. At most C$3,000 goes on line 418. The other C$1,200 is not deducted under paragraph 20(1)(b). Finance Canada's notes say amounts above the limit are included in Class 14.1; whether and how that applies here needs a professional's read of the invoice.

A founder pays first

A founder pays C$1,000 of incorporation fees on her own card before the corporation exists, and the corporation later reimburses her. If she deducted the C$1,000 anywhere, the corporation's limit for the same incorporation falls to C$2,000. Who claims it, and how much of the shared C$3,000 it uses, is settled before the first T2.

Different for you?

• You just incorporated and need CRA accounts: see after you incorporate.
• You are setting up the new corporation's books: see books for a new CCPC.
• You spent money before your first sale or before incorporating: see startup costs before your first sale.
• You paid personally and want to be repaid: see business expenses paid personally.
• You paid GST/HST on the invoice before the corporation was registered: see claiming GST/HST paid before registering.
• You are unsure a cost is allowed at all: see business expenses the CRA accepts.
• You moved a sole proprietorship into the corporation: see books after incorporating a sole proprietorship.
• You incorporated to sell your own services and may otherwise be the client's employee: see personal services business, and get corporate tax help before claiming these costs.
• Your first-year books are not set up, or the invoice, the loans and the bank records do not line up: get bookkeeping help so the T2 starts from complete books.
• Your lawyer's bill is above the limit, you or a partner paid before incorporating, or your first T2 is due: the limit is shared, the excess has its own treatment, and who incurred each cost may decide who can claim it. Get corporate tax help to settle these before the return is filed.