To change from a sole proprietorship to a corporation in Manitoba without paying immediate taxes on your business assets, you must use a Section 85 Rollover. This CRA election allows you to transfer property to your new corporation in exchange for shares, safely deferring capital gains.
Many successful businesses in Canada begin as simple sole proprietorships. 🚀 However, as your revenue grows and your personal liability increases, transitioning to a formal corporation becomes a smart financial move. This change offers better tax rates and separates your personal assets from your business debts.
In this guide, we will explore how to change from a sole proprietorship to a corporation in Manitoba. Because transferring assets can trigger a massive tax bill, we will explain the importance of a Section 85 rollover. Given the complexity of tax laws, we highly recommend browsing our directory to hire an experienced local lawyer or accountant.
Step-by-Step Process to Change from a Sole Proprietorship to a Corporation in Manitoba
Whether your business is based in Winnipeg, Selkirk, or Dauphin, the transition involves both the Manitoba Companies Office and the federal Canada Revenue Agency (CRA). 📍 It is not as simple as just changing your name; you are legally selling your sole proprietorship to a brand-new entity.
Step 1: Incorporate Your New Business
Before you can transfer anything, the new corporation must actually exist. You will need to file Articles of Incorporation with the Companies Office. Make sure the share structure is properly designed to accommodate the upcoming asset transfer.
Step 2: Value Your Assets and Goodwill
Next, you must determine the fair market value of everything your sole proprietorship owns. 💵 This includes physical equipment, real estate, inventory, and intangible assets like client lists and brand reputation (known as goodwill).
Step 3: Complete a Section 85 Rollover and Address Provincial Sales Tax
If you simply give your assets to the new corporation, the CRA views it as a sale at fair market value, which can trigger severe capital gains taxes. By filing a joint Section 85 election (Form T2057) with the CRA, you can transfer these assets on a tax-deferred basis in exchange for shares in your new company. The T2057 election must be filed on or before the earliest date on which either you or the new corporation must file a tax return for the year of the transfer. Late filings are subject to a penalty of $100 CAD per month of delay, up to a maximum of $8,000 CAD under Section 85(7) of the federal Income Tax Act.
Additionally, you must consider Manitoba’s provincial sales tax. The transfer of physical assets (like machinery, furniture, or vehicles) is subject to a 7% Retail Sales Tax (RST) under The Retail Sales Tax Act unless you qualify for the related-party transfer exemption under Section 3(18.1). To qualify, you must hold at least 95% of the fair market value of the new corporation’s issued shares for at least six months following the transfer. Under The Tax Administration and Miscellaneous Taxes Act (TAMTA), you should also obtain a Bulk Sales Clearance Certificate from the Taxation Division to ensure the transaction is fully cleared of past tax liabilities.
Step 4: Formally Dissolve Your Sole Proprietorship
After transferring your assets and setting up your corporate entity, you must officially wrap up your old business structure. Under Manitoba’s The Business Names Registration Act, you are required to submit a Dissolution of a Business Name form to the Manitoba Companies Office and pay a basic government filing fee of $60 CAD (or $120 CAD for expedited service). Dissolving the old name prevents the obligation to renew it every three years and ensures there is no legal or administrative confusion regarding your business identity.
How Much Does it Change to a Corporation in Manitoba?
Transitioning structures is significantly more expensive than starting a new business from scratch due to the accounting and legal work required. 💰 Here are the general costs you can expect.
- Manitoba Registration and Dissolution: $350 CAD for incorporation, $45 CAD for name reservation, and $60 CAD to dissolve your old sole proprietorship business name.
- Accounting Fees for Valuation: Generally $1,000 to $3,000+ CAD to properly value your business, draft Section 85 election forms, and ensure compliance with Manitoba’s 7% RST related-party rules.
- Lawyer Fees: Often $1,000 to $2,500 CAD to draft the asset purchase agreements, file the dissolution form, issue shares, and update the corporate minute book.
| Service Required | Estimated Cost (CAD) | Purpose |
|---|---|---|
| Government Fees | $455 | Name reservation ($45), Incorporation ($350), and Dissolving sole proprietorship ($60) |
| Asset Valuation & Tax Planning | $1,000 – $3,000+ | Determining fair market value for CRA |
| Legal Agreements | $1,000 – $2,500 | Drafting the transfer and share issuance |
While the upfront costs seem high, deferring thousands of dollars in capital gains taxes makes this investment incredibly worthwhile.
How Long Does the Process Take?
Incorporating the business itself can take just a few days if filed online. 🕑 However, valuing the assets, drafting the purchase agreements, and preparing the Section 85 rollover usually takes 4 to 8 weeks. It is best to start this process well before your fiscal year-end to ensure a smooth transition.
Frequently Asked Questions (FAQ)
What is a Section 85 Rollover?
A Section 85 rollover is a tax-deferral mechanism under the Canadian Income Tax Act. It allows a business owner to transfer eligible property to a taxable Canadian corporation in exchange for shares, without immediately triggering capital gains tax.
Do I have to transfer all my assets?
No, you can choose exactly which assets to roll over into the corporation and which ones to keep personally. A tax professional can help you decide the most tax-efficient strategy.
Can I do a Section 85 rollover without a lawyer?
While technically possible, it is highly discouraged. The CRA has strict rules regarding the T2057 form, which must be filed on or before the earliest tax filing deadline of either party for that year. Late filings face penalties under the federal Income Tax Act of $100 CAD per month (up to an $8,000 CAD limit). Additionally, complex local considerations like Manitoba’s 7% Retail Sales Tax (RST) related-party rules must be managed, making professional legal and accounting help essential.
What happens to my old Business Number?
Because a corporation is a completely new legal entity, it must obtain its own CRA Business Number (BN) and GST/HST account. Your old sole proprietorship BN will eventually be closed once the transition is complete.
Leave a Reply