To change a sole proprietorship to a corporation in Ontario, you must file Articles of Incorporation (costing $300 CAD), close your old business, and legally transfer your assets to the new entity. Most business owners utilize a Section 85 rollover with the CRA to defer massive capital gains taxes during this transition.
As your Ontario small business grows, you will eventually outgrow the limitations of a sole proprietorship. When your revenues increase, or when you begin hiring employees and taking on larger contracts, the unlimited personal liability of a sole proprietorship becomes a significant financial risk. Transitioning to a corporation is a natural step that offers superior tax advantages and legally separates your personal assets from your business debts.
However, you cannot simply “flip a switch” to become a corporation. ❗ In the eyes of the law, you are shutting down one legal entity (you) and creating an entirely new, distinct “person” (the corporation). Transferring your business name, equipment, and client contracts without triggering a massive tax bill from the Canada Revenue Agency (CRA) requires strict legal and accounting procedures.
Step-by-Step Process in Ontario
Whether your business is based in Toronto, Mississauga, or Ottawa, incorporating falls under the Ontario Business Corporations Act (OBCA). Because this process involves complex tax law, retaining a local corporate lawyer and an accountant is highly recommended.
Step 1: Incorporate the New Business
First, you must officially create the corporation. 🗐 You will need to order a newly updated NUANS Name Search report to secure your corporate name. Then, you file your Articles of Incorporation through the Ontario Business Registry (OBR), detailing your share structure and listing your initial directors.
Step 2: Open Corporate Bank Accounts
Because the corporation is a separate legal entity, it cannot use your old personal or sole proprietorship bank accounts. Take your new Articles of Incorporation to your bank and open dedicated corporate chequing accounts. From this day forward, all business revenue must flow into this new account.
Step 3: Perform a Section 85 Rollover (Asset Transfer)
This is the most critical and complex step. If you simply “give” your old equipment, inventory, and client lists to the new corporation, the CRA will view it as a sale at fair market value, triggering massive capital gains taxes. 💰 To avoid this, your lawyer and accountant will execute a “Section 85 rollover,” which allows you to legally transfer the assets to the corporation in exchange for corporate shares on a tax-deferred basis.
Step 4: Update Contracts and CRA Accounts
You must inform your clients, vendors, and landlords that they are now dealing with a corporation, and all existing contracts must be assigned to the new entity. Additionally, you must apply for a new Business Number (BN) and HST account with the CRA for the corporation, and formally close down the HST and payroll accounts associated with your old sole proprietorship.
How Much Does it Cost in Ontario?
Transitioning to a corporation is a significant financial investment, but the long-term tax savings and liability protection usually far outweigh the initial costs. 💵 Here is a breakdown of typical expenses in Canadian dollars:
- Articles of Incorporation: The provincial filing fee with the Ontario Business Registry is exactly $300 CAD.
- NUANS Name Search: Required for a named corporation, costing roughly $13.80 CAD.
- Corporate Minute Book: A physical or digital binder containing your corporate bylaws, share certificates, and resolutions, usually costing $50 to $150 CAD.
- Lawyer Fees (Standard Incorporation): A local Ontario law firm will typically charge $1,200 to $2,500 CAD to draft the articles, organize the minute book, and issue the initial shares.
- Accountant / Legal Fees (Section 85 Rollover): Executing a tax-deferred asset rollover is complex. Expect to pay an additional $1,500 to $4,000 CAD for this specialized tax work.
| Requirement | Old Sole Proprietorship | New Ontario Corporation |
|---|---|---|
| Tax Filing | Reported on your personal T1 tax return. | Must file a separate T2 Corporate Tax Return. |
| CRA Accounts | Tied to your Social Insurance Number (SIN). | Requires a brand new 9-digit Business Number (BN). |
| Business Name | Requires a Business Name Registration (BNR). | Name is secured via Articles of Incorporation. |
How Long Does the Process Take?
Filing the initial Articles of Incorporation online is practically instant. ⏱ However, the entire transition process takes much longer. Setting up new bank accounts, transferring commercial leases, and properly executing a Section 85 rollover with your accountant generally takes 1 to 3 months to fully complete. It is highly recommended to plan this transition to align with your fiscal year-end to simplify your accounting.
Frequently Asked Questions (FAQ)
Can I keep using my exact same business name?
Generally, yes, but you must add a legal corporate identifier like “Inc.”, “Corp.”, or “Ltd.” to the end of the name. If you previously registered the name as a sole proprietorship, you must cancel that registration to free up the name for the corporation.
Do I have to close my old sole proprietorship immediately?
Yes, once the assets are transferred to the corporation, you should formally close your sole proprietorship accounts with the CRA and cancel your Business Name Registration to avoid tax confusion and dual reporting requirements.
What happens to my old business debts?
When you transition, the new corporation can assume the debts of the sole proprietorship. However, the bank or creditor must agree to this. If they do not, you remain personally liable for any loans you took out before incorporating.
Is a Section 85 rollover mandatory?
It is not mandatory, but if you have significant assets (like heavy equipment, real estate, or a valuable client list/goodwill), failing to use a Section 85 rollover means you must pay personal capital gains taxes on the “sale” of those assets to your own corporation.
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