Exciting times ahead! You are considering transitioning your business from a Sole Proprietorship (SP) to a Corporation. You are about to turn into a Shareholder of a Corporation.
Let's review what this change entails:
New legal entity: When you register your corporation you are creating a new legal entity, that you own a shareholder by yourself (100 percent ownership) or with other individuals or legal entities (corps) (partial ownership).
This means that you will not be reporting all the income the business makes under your personal tax return (T1). Instead, you will report only what you receive from the business via payroll, bonuses, dividends, stocks, and shareholder draws (more on this in another blog post). The Corporation will file its own taxes (corporate taxes) or T2.
New bank accounts: You are required to open new bank accounts. Again, this is a new legal entity, and as such it requires its own bank accounts. You will be required to bring the Articles of Incorporation to the bank as well as personal identification that will confirm that you are (one of) the shareholder of this business.
New Financial Books: You will need a new set of accounting books. Same logic as above, as a new legal entity the Corporation will require its own set of books. We strongly recommend you subscribe to an online accounting software. While there are many good choices in the market we use Quickbooks Online for our clients and our firm. We love the integration with other platforms and the constant improvement.
New ways available to compensate yourself: Determine whether you will need to be paid regularly. Set up a payroll system so that you can access funds in an organized manner. Remember you cannot just withdraw funds like you did within your SP. You have different options and also different compliance requirements.
Above all, avoid having the corporation pay for any of your personal expenses. In a 2021 court case, the CRA reassessed both a corporation and the taxpayer’s mother with gross negligence and penalties after deducting capital expenses for a vacation property along with various operating expenses related to said property. Yikes! To read the article click here.
You are thinking this is all great - but what do I do with the SP accounts and other admin tasks left? We thought of that too! Here our top tips for you to close your SP with ease:
Liabilities: Determine how much is owed to CRA- personal taxes, payroll source deductions (if applicable) and GSTHST. Log in to your CRA My Account and My Business Account to get the most up-to-date balances, if any.
Chequing Account Balance: You could move this $ balance to your personal bank account or your Corporation. Ask your Accountant to help you guide your decision. If you decide to move the funds to the Corporation, there are some interesting options to consider. For example: .Setup a Shareholder's Loan account or a Share Capital account. The category will depend on how you wish to access the funds at a later point.
Closing your Chequing Accounts: Wait! You should leave your SP's bank accounts open until you have paid all the CRA liabilities, your vendors, and employees if any.
Inactivate your SP's Business Number: Once you have sent all the dues to CRA you will be able to close the Sole Proprietorship business number with CRA. Log in to your CRA My Business account, and close each of the program accounts as required.
Cancel your online accounting software subscription: (if you have one) Only after your bookkeeper has reconciled all the bank accounts and completed all the adjustments required for tax filing. Keep a copy of your financial statements for tax time.
Being prepared for the transition from a Sole Proprietorship to a Corporation is crucial—it brings peace of mind, saves you money, and streamlines your time.
Should you have any questions, feel free to reach out to Contact Us.
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