Who this is for
- Canadian sole proprietors moving an existing business into a new corporation
- Owners who have incorporated and still have accounts, platforms or contracts in their own name
Not covered here
- The section 85 rollover calculation and the tax on moving assets
- Bookkeeping cutoff and opening entries
- Whether to incorporate at all, and how to incorporate
- Moving rental properties into a corporation
- Province-by-province licence, name and vehicle registration steps
Sole proprietorship to corporation in Canada: what changes, and in what order?
Everything that carries your name or your business number (BN) has to be moved or replaced, because the corporation is a different legal person. The CRA treats incorporating an existing business as a change of legal status: the corporation gets a new BN, the GST/HST (RT) and payroll (RP) accounts on your old BN do not move to it, and you close the old BN and its accounts (CRA: Change of legal status).
| Step | What to do | When |
|---|---|---|
| 1 | Pick the transfer date; incorporate (How to incorporate in Canada) | First |
| 2 | Get the corporation's new BN | After incorporating |
| 3 | Register its GST/HST (RT) account, if needed | Before the transfer date |
| 4 | Open its bank account; move processors and platforms | Before the transfer date |
| 5 | Move assets, with any section 85 and GST44 elections (Moving a business into a corporation) | On the transfer date |
| 6 | Tell clients and suppliers; invoice in the corporation's name | From the transfer date |
| 7 | Open its payroll (RP) account; final remittance on the old one | Before its first remittance is due |
| 8 | Move licences, insurance, leases, loans and the business name | Before the transfer date |
| 9 | Close the old accounts; file the final T2125 | Payroll: remit and file slips, then close. GST/HST: close, then file the final return. BN last |
A case is not simple when assets worth real money move (an election sets their tax value, and a late one brings a penalty or can be refused), when you have staff, or when you are registered for GST/HST (the corporation must be registered too for the GST44 election). The order matters: the corporation's accounts must exist before customer money, invoices and payroll start running through it.
Gather first: the transfer date, a list of assets with cost and market value, every account, platform, loan, lease, licence and contract in your name, and your BN, RT and RP numbers with the last returns filed.
Step 1: Which date does the corporation take over?
The transfer date is the day the corporation starts running the business; everything before it is yours, everything from it is the corporation's. Put it in a written transfer agreement that lists what moves. Pick a date the bank account and CRA accounts can be ready for, often the first day of a month. Which sales and bills fall on each side of the date is covered in Books after incorporating a sole proprietorship.
Step 2: Does the corporation keep my business number?
No. The corporation gets a new BN with a corporation income tax (RC) account. Incorporating federally, or in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Prince Edward Island or Saskatchewan, registers the new BN automatically (CRA: When you need a BN); otherwise, register it with the CRA once you have the incorporation documents. Then register RT and RP accounts on the new BN if the corporation needs them (CRA: Change of legal status). A business physically located in Québec registers and files GST/HST with Revenu Québec instead (CRA: Register as a resident). Fixing an account set up wrong is covered in After you incorporate.
Step 3: Does the corporation need its own GST/HST number?
Yes, if it is not a small supplier or chooses to register. The $30,000 test counts the taxable sales of the corporation and its associates (CRA: When to register; Excise Tax Act, section 148), and a person who controls a corporation is its associate (subsection 127(2)). Association is tested at the start of each calendar quarter, so from the corporation's first full quarter your sales in the four quarters before it count toward its total.
If you are registered for GST/HST, the election that moves the business without GST/HST (step 5) needs the corporation registered too: it is not available when the seller is registered and the buyer is not (Excise Tax Act, paragraph 167(1)(b)). So register the corporation before the transfer date. The registration test is in When to register for GST/HST.
A provincial sales tax number in your name does not move either. British Columbia must be told when a sole proprietor becomes a corporation, and a PST number is not transferable (BC: PST Bulletin 001); elsewhere, ask the province or Revenu Québec whether the corporation needs its own PST, RST or QST number. See Charging GST/HST, PST and QST by province.
Step 4: Do my bank account and payment platforms move to the corporation?
No. Open a bank account in the corporation's name and move card processors, payment links and online platforms to the corporation's name and BN before the transfer date. Once the corporation has taken over the business, its sales are generally its income wherever the money lands, so a deposit to your own account has to be traced back into its books and GST/HST return. Platforms report sellers to the CRA by name and tax number: a SIN for an individual, a business registration number for an entity (CRA: Information platforms share). An account left in your name reports the corporation's sales under you. To fix money already mixed, see Corporate income in a personal account.
Step 5: Transferring assets from a sole proprietorship to a corporation: which ones, at what value?
Each item that moves is a sale by you to the corporation, so list every one in the written transfer agreement. Because you control the corporation, you do not deal with it at arm's length (Income Tax Act, section 251), so a transfer below market value is treated as a sale at market value for you (section 69). Moving a vehicle "for nothing" does not avoid the tax, and if you owe tax for that year or earlier, the corporation becomes liable for it too, up to the value it did not pay for (section 160).
The alternative is a section 85 election: you take back consideration that includes shares, and you and the corporation jointly elect an agreed amount for each eligible asset, which becomes your proceeds and the corporation's cost (Income Tax Act, subsection 85(1)). The election goes on Form T2057, due by the earliest income tax return filing deadline of either party for the transfer year (subsection 85(6)). For Québec income tax, you and the corporation also file Form TP-518-V with Revenu Québec by the later of the earliest relevant income tax return filing deadline and the last day of the second month after the later party's tax year-end; filing late brings a penalty.
| Item | Gather |
|---|---|
| Vehicles and equipment | Cost, remaining tax cost, market value, ownership papers |
| Inventory | Count and cost at the transfer date |
| Unpaid customer invoices | List at the transfer date, with amounts already reported as income |
| Goodwill and client lists | What the business is worth beyond its assets |
The agreed-amount limits, late filing and receivables are in Moving a business into a corporation.
GST/HST is a separate question. When the corporation acquires all or substantially all (generally 90% or more) of the property needed to run the business (CRA: Memorandum 14-4), you and the corporation can jointly elect on Form GST44 so that no GST/HST is payable on most of the transfer. A registered corporation files it by the due date of its first GST/HST return covering tax that would otherwise arise on the transfer. Services you will still supply, leases and licences stay taxable (Excise Tax Act, subsection 167(1.1)). Isolated assets moved without the rest of the business do not qualify. In Québec, the election is filed with Revenu Québec on its own form, named in Moving a business into a corporation.
Step 6: Contracts, invoices and clients: what changes after the date?
From the transfer date, invoices and contracts go out in the corporation's name and, if it is registered, with its own GST/HST number; a federal corporation must use its legal name in contracts and invoices (Corporations Canada: Naming a corporation). A customer claiming an input tax credit on a purchase of $100 or more needs the supplier's registration number on the invoice (CRA: ITC information requirements). Never put your old RT number on the corporation's invoices; to correct invoices already sent, see After you incorporate.
Contracts signed in your name stay yours until the client signs a new one or agrees to an assignment, so read each contract's terms. Send clients and suppliers the corporation's legal name, BN, address and payment details, with the date they start dealing with it, and keep a copy. Clients that file a T4A or T5018 identify a business recipient by its business number (CRA: Filling out the T4A slip), so give them the corporation's details and ask that slips for its income name the corporation, not you.
Step 7: Do my employees need a new payroll account?
Yes. The corporation, as the new employer, needs its own RP account, registered before its first remittance is due: generally the 15th day of the month after the first pay with deductions (CRA: Payroll account). The old account must make a final remittance within 7 calendar days of the legal status change (CRA: When to remit). Before it closes, remit all source deductions, file the final information returns and give employees their slips, due 30 days after the old business stops unless the old balance moves to the corporation's account (CRA: When to file; CRA: Closing your accounts). Whether the old balance moves to the corporation, and the successor-employer rules for CPP and EI, are in Books after incorporating a sole proprietorship.
Step 8: Do licences, insurance, leases and my business name move automatically?
No. Each is held in a named holder's name under its own terms. Check each one with its issuer or the other party:
- Business name: a name you registered personally is registered to you. A federal corporation operating under a name other than its legal name registers that name in each province or territory where it operates (Corporations Canada); a provincial corporation follows its province's rules.
- Licences, permits and workers' compensation accounts: ask each issuer whether the corporation needs its own.
- Insurance: have the corporation named as the insured before the transfer date.
- Leases and loans: they move only if the landlord, lessor or lender agrees.
- Vehicles: transfer the registration under your province's rules, along with the insurance and any loan.
Step 9: How do I close the sole proprietorship: final T2125 and old accounts?
Your business's fiscal period ends when it stops, so it can be shorter than 12 months (CRA: T4002, chapter 1). With the usual December 31 year-end, the final T2125 covers January 1 to the day before the transfer date and goes with your personal return for that year (CRA: Completing Form T2125). The corporation's own first tax year and first T2 are in First corporate tax year.
Close the old GST/HST account once the assets have moved: business property you still hold when the registration ends is treated as sold, with tax worked out on it (CRA: Close your GST/HST account). Closing comes first and creates up to two final periods, each with a return due one month after it ends; the second is needed only if there is tax to remit. The CRA's closing page does not deal with a business moving to a corporation, so confirm the cancellation date with the CRA; the detail is in Closing a GST/HST account. Then close the old BN; the CRA says some forms may be needed first (CRA: Closing your accounts). If another business or account of yours still runs under the old BN, ask the CRA which accounts to close. Amounts still owed on the old accounts stay yours. As the corporation's director, you can also be personally liable for GST/HST and payroll deductions it fails to remit; the CRA must act within 2 years after you last cease to be a director (Excise Tax Act, section 323; Income Tax Act, section 227.1).
What to keep on file for both sides
Keep the sole proprietorship's records for six years from the end of the tax year in which it ended (CRA: How long to keep your records). Both files hold a copy of the transfer agreement and the asset list.
| Your file | The corporation's file |
|---|---|
| Final T2125 working papers, last bank and card statements | Incorporation documents and the new BN, RT and RP notices |
| Final GST/HST return, payroll remittance and slips | Asset list with cost, market value and agreed amount |
| Confirmation each old account is closed | Copies of T2057 and the GST/HST election as filed |
| Notices sent to clients, suppliers and platforms | New contracts, leases and insurance in its name |
See How long to keep business records.
Example
These examples are illustrative; all amounts are Canadian dollars.
An Ontario consultant's corporation takes over on July 1
She incorporates in June with a new BN, registers the corporation for HST from July 1 and opens its bank account. On July 1 she emails clients the corporation's name, BN and banking details; every invoice from then on shows the corporation and its own HST number. Her only asset, a laptop, moves at its market value (GST/HST on that sale is left out here). Her final T2125 covers January 1 to June 30. She then closes the old HST account, files its final return by the due date, and closes the old BN.
A contractor moves the business with four work vehicles
The whole business moves, including four work trucks worth $120,000 in total. Assume they are the whole capital cost allowance class, cost more than $120,000, and have a remaining tax cost of $70,000. Both sides are GST/HST registrants, so they sign GST44 and no GST/HST is charged on the transfer. Without an election, the $50,000 difference could be recaptured as income. A T2057 election with an agreed amount of $70,000, in exchange for shares, defers it if its conditions are met. The truck loans move only with the lender's consent, and a loan the corporation takes over counts as payment other than shares, which can raise the agreed amount.
An online seller leaves the processor in her name
Her corporation takes over the business on April 1, but she keeps her payment processor under her own name and SIN until June 30, and $45,000 of sales land there. Those are the corporation's sales: they go in its books and on its GST/HST return, and she owes the money to the corporation until she moves it across. The platform's report will still show the sales under her SIN, so she keeps the reconciliation.
Different for you?
- Vehicles, equipment, inventory or goodwill worth moving under section 85: the agreed amounts and the T2057 deadline are in Moving a business into a corporation; get business formation help before signing the transfer.
- You are registered for GST/HST and the corporation will be too: the GST44 conditions and timing decide whether tax applies to the transfer; get business formation help.
- You have employees: two payroll accounts, a final remittance and slips overlap in the transfer year; see Books after incorporating a sole proprietorship and get business formation help.
- Sales already landed in your own account or on a platform under your SIN, or you invoiced under the old GST/HST number: they have to be traced into the corporation's books and GST/HST return; see Corporate income in a personal account and After you incorporate, and get bookkeeping help.
- You used to take owner's drawings: money you take out of the corporation is salary, a dividend, a shareholder loan or repayment of what it owes you; see Paying yourself in the first year and Shareholder loans.
- You need the bookkeeping cutoff and opening entries: see Books after incorporating a sole proprietorship.
- You are still deciding whether to incorporate: see Sole proprietorship or corporation?.
- You want to deduct the incorporation fees: see Incorporation costs.
- Rental properties are moving too: see Moving rentals into a corporation.
- You want to undo the move later: see Going back to a sole proprietorship.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| GST/HST small supplier threshold Worldwide taxable sales, including zero-rated supplies, with associates, in one calendar quarter or over the last four consecutive calendar quarters; excludes financial services, sales of capital property and goodwill | $30,000 | CRA: When to register for and start charging the GST/HST Checked |
| Federal section 85 rollover election deadline The proprietor and corporation jointly elect on Form T2057 under Income Tax Act subsections 85(1) and 85(6) | The earliest income tax return filing deadline of either party for the transfer year | Income Tax Act: subsection 85(6) Checked |
| Québec TP-518-V original filing deadline Both parties complete the form; file it separately from an income tax return with Revenu Québec | The later of the earliest relevant income tax return filing deadline and the last day of the second month after the later party's tax year-end | Revenu Québec: Form TP-518-V, page 5 Checked |
| Fair-market-value share of necessary property for GST/HST business-sale election Under the agreement, the buyer obtains ownership, possession or use of all or substantially all (generally 90% or more) of the fair market value of property reasonably necessary to carry on the business | 90% | CRA: GST/HST memorandum 14-4 Checked |
| GST44 filing deadline for a registered recipient The supplier and recipient make the election jointly; the registered recipient files it, unless CRA allows a later date | The due date of its first GST/HST return covering tax that would otherwise arise on the transfer | Excise Tax Act: subsection 167(1.1) Checked |
| ITC invoice threshold for added tax details At this total sale amount, tax details and supplier GST/HST number become required | $100 | CRA: Input tax credits Checked |
| Ordinary first payroll remittance deadline Unless CRA assigns a different remittance frequency | The 15th day of the month after the first pay with deductions | CRA: Determine if you need to register for a payroll account Checked |
| Final payroll remittance after business stops Measured from the date the business stops operating | 7 calendar days | CRA: When to remit payroll deductions Checked |
| Final payroll information-return deadline after business stops Measured from the date the business stops operating | 30 days | CRA: When to file payroll information returns Checked |
| GST/HST closing-period return deadline After each reporting period created on cancellation, including an annual filer's short period; the second return is required only if tax is remittable. Excise Tax Act 238(1)(b), 238(2), and 251(2); CRA's example agrees. | One month | CRA: Close your GST/HST account Checked |
| Director liability limit after leaving office Income-tax recovery proceeding and, by statutory cross-reference, CPP and EI recovery proceedings; GST/HST director assessment has the same period under Excise Tax Act section 323(5) | 2 years | Income Tax Act: Director liability Checked |
| Retention period after a business that is not incorporated ends After the last day of the tax year in which the business ceased; prescribed for the general ledger and the contracts needed to understand it, and stated by the CRA for the records of a non-incorporated business that ends | Six years | Income Tax Regulations, section 5800(1)(c) Checked |
Primary sources
- CRA: Change of legal status
- CRA: When you need a business number
- CRA: Register for a business number as a resident
- CRA: When to register for and start charging the GST/HST
- Justice Laws: Excise Tax Act, section 127
- Justice Laws: Excise Tax Act, section 148
- British Columbia: PST Bulletin 001, Registering to collect PST
- Justice Laws: Excise Tax Act, section 167
- CRA: Form GST44
- CRA: GST/HST Memorandum 14-4, Sale of a business or part of a business
- Justice Laws: Income Tax Act, section 85
- Justice Laws: Income Tax Act, section 69
- Justice Laws: Income Tax Act, section 160
- Justice Laws: Income Tax Act, section 251
- CRA: Form T2057
- Revenu Québec: Form TP-518-V
- CRA: What information digital platform operators share
- Corporations Canada: Naming a corporation
- CRA: Input tax credits, information requirements
- CRA: Filling out the T4A slip
- CRA: Determine if you need to register for a payroll account
- CRA: When to file payroll information returns
- CRA: When to remit payroll deductions
- CRA: Closing your business accounts
- CRA: Close your GST/HST account
- CRA: T4002, chapter 1, fiscal period
- CRA: Completing Form T2125
- Justice Laws: Excise Tax Act, section 323
- Justice Laws: Income Tax Act, section 227.1
- CRA: How long to keep your records
About this guide
Published by Cloud Accounting under standing professional approval. This version has no separately recorded personal review. It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.