Filing articles of incorporation takes minutes online. That is what misleads people. The new corporation exists right away, but your business does not move into it by itself. Your truck, your customer contracts, your website, your staff, your lease and your goodwill all stay exactly where they were, in your personal name, until someone takes steps to transfer them.
Plenty of Brampton owners incorporate, begin invoicing under the new name, and treat the job as done. Years later an accountant, lender or buyer finds that the corporation has no paperwork showing it ever acquired the business it has been running. Sorting that out afterward is usually harder and more expensive than doing it properly at the start.
This post looks at the mechanics of the move, in general terms. It is not legal or tax advice for your business. The tax side in particular is fact-specific, so plan to involve both a lawyer and an accountant before any assets change hands.
If you are still deciding whether to incorporate at all, that’s a different question, with its own trade-offs of cost, tax and liability. Here we assume you’ve decided, and want to do it correctly.
Set the Date, Then Work Backward
Pick a transition date, and let everything else line up around it. Many owners choose the beginning of a month or quarter, because it makes the accounting cleaner. Bookkeeping should show clearly what happened before that date in your personal business, and what happened after in the corporation.
Your transfer cannot be backdated to suit a tax result. If you signed the transfer in June, it should say June. Documents that pretend otherwise invite trouble with the Canada Revenue Agency, and they can undermine your credibility in any later dispute.
Note that you’ll report the proprietorship’s income on your personal return up to the transfer date, and the corporation will report from then on. Your accountant will want to plan this, because it can affect your income and tax instalments in the transition year.
Create the Corporation With the Move in Mind
The incorporation itself should be set up to receive this particular business. A few decisions matter more for a moving business than for a brand-new one:
- Name. A corporate name may require a NUANS name search report. Your existing business name may or may not be available for use as a corporate name.
- Share structure. Different classes can give flexibility for family members or a later rollover, though Canadian tax rules limit income-splitting. Discuss this with your accountant first.
- Ontario or federal. Most local businesses find Ontario incorporation sufficient, while a federal company has broader name protection. Our page on business formation and organization outlines this work.
- Directors. Remember that directors carry personal exposure for certain unpaid wages, source deductions and HST. Moving into a corporation does not remove all your personal risk.
- Organization. Pass the first by-laws, issue shares, and start the minute book and registers, including the register of individuals with significant control. Then file the Ontario initial return within 60 days.
The Asset Transfer Agreement
The core document is usually an agreement under which you, personally, transfer the business assets to the corporation in exchange for shares, a promissory note, or a mix. It should list what’s moving:
- Equipment, tools, vehicles and furniture
- Inventory and work in progress
- Accounts receivable, if they are being transferred
- Customer lists, contracts and goodwill
- Trademarks, domain names, social media accounts, websites and software
- Phone numbers, which often matter more than people think
Think also about what you might leave out. Some owners keep real estate or a key piece of equipment personally and lease it to the corporation. There can be both liability and tax reasons to do so, but it needs real advice.
Some assets have their own transfer process. Vehicles need to be re-registered through ServiceOntario. Registered trademarks should have the change recorded with the Canadian Intellectual Property Office, and copyright assignments must be in writing and signed. Do not forget assets financed under a loan or lease. A lender with a registered security interest may need to consent, and its security could follow the asset.
Section 85: Avoiding a Tax Bill on the Transfer
Transferring property to your corporation counts as a disposition for tax purposes, generally at fair market value. Without planning, moving a business you built over years could trigger capital gains on goodwill or recapture on equipment, even though no cash has changed hands.
Section 85 of the Income Tax Act offers a way to defer that. You and the corporation jointly elect an agreed value, within prescribed limits, and tax is generally deferred until a later event, such as selling the shares. In order to use this, you must receive at least one share of the corporation as part of what you get in exchange. The election is made on CRA Form T2057, and it is generally due by the earlier of the two parties’ filing deadlines for the year of the transfer. Late elections may be possible within limits, but they can bring penalties and are not something to count on.
Not everything qualifies. Certain property, such as some real estate held as inventory, may be excluded. Receivables are often handled separately through another election. And the numbers need thought: taking back too much in a note or other non-share payment can trigger tax anyway. This is a job for your accountant working with your lawyer, since the election and the transfer agreement have to match each other.
GST/HST on the Transfer
HST can apply when assets move between you and your corporation, even though you own both sides. Section 167 of the Excise Tax Act allows a joint election, usually on Form GST44, so no tax is payable on the transfer of a business or part of a business, provided the conditions are met. The election relates to a business as a going concern, not individual assets, and where it applies, there are registration conditions on the recipient. It also won’t cover everything, such as certain leases. Timing of the filing matters, and missed or late filings have caused trouble in the past.
The corporation will also need its own tax accounts. Your sole proprietorship’s business number won’t simply carry over, because a corporation is a separate person. The corporation will need its own business number, along with HST and payroll accounts where necessary, and you should wind down your old ones after the final returns are filed.
Customers, Suppliers and Other Contracts
Contracts generally do not transfer automatically. Read each significant one for these questions:
Does it allow assignment? Many contracts require consent. Consider commercial leases especially, because a landlord may have to approve the assignment and might ask for a personal guarantee or a fee.
Who is still liable? Assigning a contract generally does not release you unless the other side agrees. For a clean break, you need a novation, which is an agreement where the other party accepts the corporation in your place. Most large suppliers and landlords won’t agree to it without something in return.
Are there credit terms? Suppliers may treat your corporation as a fresh customer with no history. They may ask for a personal guarantee. That guarantee may be reasonable, but understand that it takes away much of the liability benefit for that supplier.
Update the rest as well: letterhead, invoices, website, email signatures, payment instructions and quotes. Use the full corporate name, or a registered business name. Under Ontario law, a corporation must set out its name in legible characters in contracts, invoices and other documents. If you keep signing with your old trade name and no corporate name attached, a customer or lender might later argue you are personally on the hook. For more on this work, visit our contracts page.
Your business name registration needs a look too. A registration held by you as a sole proprietor is not automatically owned by your corporation. If the corporation will use a trade name, register it under the Business Names Act in the corporation’s name, and cancel the old one when appropriate.
Your Employees Come With Their History
If you have staff, the corporation does not get a fresh start with them. Under section 9 of Ontario’s Employment Standards Act, 2000, when a business is sold or transferred and the buyer employs the seller’s employee, the employment is generally treated as continuous for purposes of the Act. That affects vacation, termination and severance calculations. An employee who has been with you for eight years has eight years of service.
Do these things as part of the move:
- Give written notice of the change of employer and, ideally, new employment agreements, with proper consideration for any changed terms
- Set up a corporate payroll account and adjust T4 reporting for the transition year
- Open a WSIB account or update your coverage, because a sole proprietor’s status can differ from that of a corporation’s workers, and directors have separate rules
- Move benefit plans and group insurance
- Record accrued vacation and other amounts as of the transfer date
Licences, Insurance and Bank Accounts
This is the list that bites later, because nothing tends to go wrong until a claim or inspection.
Insurance. Tell your broker before the transition. If your policy names you personally and the corporation is the one now operating, an insurer may raise questions when a claim arrives. Add the corporation as the named insured, and sort out any certificates issued to customers.
Licences and permits. Business licences, trade certificates, vehicle operator registrations, regulator approvals and health permits can be personal or tied to a specific entity. Some Brampton business categories require a licence from the city, and a change in legal entity may mean a fresh application. If you are in a licensed trade, ask your regulator if the corporation needs its own certificate. Some professions face special rules on whether and how they can incorporate at all.
Bank. Open a corporate account and move operations into it. Don’t mix accounts. Paying personal bills from the corporate account and then calling it salary muddies your records and may weaken the separation you just paid to create.
What Does Not Go Away
Incorporating does not erase your past. Debts you incurred as a sole proprietor stay your debts, even if the corporation takes over operations. Claims from jobs you did personally can still be brought against you personally. CRA can still pursue you for your personal returns and HST from that period.
Be especially careful if creditors are already circling. Moving assets into a corporation for shares while you owe money that you cannot pay can be attacked as a fraudulent conveyance or a preference under Ontario law, and the transfer can be set aside. Do not treat incorporation as a way to get away from a looming judgment. Get legal advice first.
Going forward, the corporation’s protection has limits too. A person who personally performs negligent work can still be sued. A guarantee is still a guarantee. And corporate formalities need to be kept up, including annual returns, resolutions and financial statements.
A Workable Order of Steps
Here is one sensible order, though your own advisers may adjust it:
- Meet your accountant to model the tax outcome and choose a date.
- Have a lawyer review your key contracts, lease and loans.
- Incorporate, then organize the corporation.
- Open bank and CRA accounts, and arrange WSIB and insurance.
- Sign the asset transfer agreement and issue shares.
- Get consents and assign contracts.
- Update employees, customers, suppliers and licences.
- File tax elections on time, then close the old accounts after final returns.
This is a project of a few weeks, not a few minutes, and some items will trail on for months. If you are ready to move an existing business into a corporation, please contact our office so we can review what you have and coordinate with your accountant. Doing it once and properly is much easier than reconstructing it later, when a lender or buyer is waiting.