An incorporation certificate does not by itself move every asset, contract and tax account from a sole proprietorship into the new corporation. A useful transition starts with an agreed effective date and a record of what changes hands.
This is a preparation checklist for an incorporation already being considered, not a claim that incorporating will reduce everyone's tax.
Freeze a clear opening position
Prepare a dated list of cash, unpaid customer invoices, supplier balances, inventory, equipment and debts. Include purchase dates, original costs and tax balances for capital assets, along with information needed to establish current values.
For example, a sewing machine's remaining loan is not its tax cost or its market value. Keeping those figures distinct avoids importing an unexplained number into the corporation's opening records.
Document who owns each item and which contracts can be transferred. Obtain legal or professional help for agreements that need consent.
Plan the accounts and tax treatment
The CRA treats a change from sole proprietorship to corporation as a change in legal status requiring a new business number for the corporation. Review the new program accounts needed and the old accounts' final returns and closure requirements.
Asset transfers can have tax consequences. A section 85 election may permit tax-deferred treatment for eligible property when its conditions and filing requirements are met; it is not created automatically by moving equipment into the corporation's books.
Have the transfer structure and required elections settled before treating the transaction as complete. GST/HST, payroll and income tax obligations each deserve a separate check.
Separate later transactions
Use the corporation's banking and records from the appropriate date, and identify payments received on old invoices. Preserve the sole proprietor's records for their required retention period.
Finally, review how the owner will take money out. The simple sole-proprietor owner-draw treatment does not carry over unchanged to a corporation. Salary, dividends and shareholder transactions need their own accounting and tax treatment.
