From Sole Proprietor to Corporation

by Amber
(Canmore, AB, Canada)

You don't know what you don't know.<br>Section 85 rollovers are complex and not as easy as they look.

You don't know what you don't know.
Section 85 rollovers are complex and not as easy as they look.

Hello Everyone!

Has anyone out there dealt with a client who has changed from a sole proprietor to a corporation?

I am using QuickBooks for a client who has changed from a sole proprietor to a corporation. I am trying to do their first year since incorporation and had some queries about how to go about doing their first year.

I don't know which is the right way to go about this problem.

a) Should I carry on with their sole proprietor QuickBooks file and start entering their first year since incorporation?

b) Or do I start up a new QuickBooks file for their first year since incorporation?

If starting a new file, how should I go about doing up this new file? Looks like a rather difficult task to do and maneuver around with.

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Hello Amber,

Thank you very much for your question. It's an excellent question ... however you are probably not going to like my answer.

In my humble opinion, bookkeepers should not be doing section 85 rollovers for their clients without the assistance of an accountant.

A section 85 rollover allows for a tax free transfer of assets from a sole proprietorship to a corporation.

Without this section of the Income Tax Act, the business owner would have to sell the business assets at fair market value with the gain (or loss) reported on their personal tax return.

It is a very complex section of the tax act. Although it may look like a few easy entries, if done incorrectly, it could cost the business owner significant lost tax deductions ... thereby creating increased income taxes.

ALthough I have a fairly good idea of what entries need to be made, I would not take on a rollover without direction from the business owner's tax accountant. If your client does not have a tax accountant, you should strongly recommend that they consult one.

To business owners out there - when you switch your sole proprietorship to a corporate entity ...




... see a tax accountant who is familar with section 85 rollovers.

Section 85 rollovers have complex accounting, tax and legal consequences. If a bookkeeper isn't familiar with the nuances of the Income Tax Act with regards this section of the tax act, they could naively and easily get you in a lot trouble.

Your accountant can then instruct the bookkeeper on what journal entries need to be made to the sole proprietorship books to close them ... and the journal entries required to startup the books for the corporation books.

Thanks Amber for your excellent question. I hope this information helps you. You may also be intersted in this forum posting, Transferring from Proprietorship to a Limited Company (See this posting below).

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

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Oct 08, 2011
Corporation Newbee
by: Cari from Aberdeen

I am in the process of finishing our first fiscal year for our corporation and having issues with the bank statement, visa, payroll deductions, and will soon have health benefit deductions.

We merged from sole to corporation and have balances transferred. Owner has a hard time separating personal and business, so how do I balance the bank and visa? How would I enter payroll and now health benefits.

I want the corporation to start off smooth so CRA is not always auditing us.

Oct 08, 2011
Section 85 Rollovers
by: Lake

Hi Cari,

I moved your post to this thread because of the complexity of section 85 rollovers.

Bookkeepers should not do section 85 IMHO. My advice for you is the same I gave Amber, please see a tax accountant to ensure you don't receive any surprise assessment from CRA if the section 85 wasn't handled correctly.

P.S. Utilizing section 85 of the ITA requires an election be made.

Business owners who have a hard time keeping personal and business expenses separate are just begging CRA to audit not only their business but their personal lifestyle as well.

The best you can do is have the business owner go through every bank and visa statement and write a "P" for personal or "B" for business beside every bank withdrawal or credit card expense.

I'm assuming you know that expenses posted from bank statements and credit card statements will not hold up during an audit unless you have proof of purchase (a sales invoice/receipt) as well.

I cannot in one post tell you how to do payroll. That is too large a question. If you have a specific payroll question, I may be able to answer it.

If you are new to payroll, checkout my Payroll page.

Sorry I couldn't help you more but your question(s) are not specific enough ... you are basically asking. "how do you keep a set of records for a corporation".

Please take some time ... I recommend 10 - 15 minutes every day ... to just read through my site. There are over 450 pages to help a small business owner do their own books.

Oct 11, 2013
Incorporating my Business
by: Michelle (Alberta)

I can't imagine trying to do this on my own or without experienced help. I'm a business owner moving from a sole prop. to Incorporated at my accountants suggestion.

She already recommended we do our Section 85 rollover on Jan 2 of next year (it's October) because that way we get the full year of depreciation on our equipment. We estimate that just waiting the last 2.5 months to transfer assets will save us over $6,000 on our personal taxes.

We also have loans on business trucks that will need to be refinanced or assumed by the new company. And a ton of equipment.

Lake's advice not to tackle this on your own is well heeded. I will have an experienced accountant and experienced lawyer assisting me with this.

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Transferring From Proprietorship To LTD

by Cora

I am doing books for a company and I need to transfer account balances of vendors from proprietorship to ltd company. How do I enter a transaction for the proprietorship to zero balance the vendor accounts?

All the opening balances are already in the Ltd company but in the proprietorship books I need to somehow show that its been transferred to the Ltd company.

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Hello Cora,

I'm going to start this post with a caution.

When a proprietorship changes its organizational entity, it's done through a Section 85 Rollover. Section 85 of the Income Tax Act lets you rollover your assets tax free instead of at fair market value.

Although this series of transactions sounds simple and easy, a rollover is actually very complex and requires you make an T2057 Election. If you make a mistake, it could cost the client a fortune because CRA doesn't let you have a "do over".

It is always advisable to have the guidance of a certified accountant to do rollovers as CAs and CGAs have been trained on how to do them correctly. I personally will not do a rollover unless supervised by a certified accountant.

That said, it is my understanding that any accounts payable are the responsibility of the sole proprietor and are not transferred to the corporation. These debts should be paid by the sole proprietor.

If that did not happen, it is my understanding that any accounts payable pertaining to the sole proprietorship that were paid by the corporation are to be recorded as a shareholder draw.

Please don't take my word for this. You really should check with a certified accountant on the proper handling of any journal entries related to a Section 85 rollover.

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Dec 24, 2011
UCC Balance and Transfer of Business Assets
by: Ahmahn, Ontario, Canada

I'm going to be paying myself the reasonable allowance per /km since the business use of my car is over 90% to run the incorporated business.

What happens to the UCC balance on the personal tax return since I was formerly operating as sole proprietor?

P.S. What a great site!

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Please read the above post and also the forum post called From Sole Proprietor to Corporation (See posting above).

I'm going to assume you had your accountant make an election to do a section 85 rollover when you changed business structures.

If not, then you are required to sell all your assets in your sole proprietorship business at fair market value. The sale of most of the assets will trigger a terminal loss or recapture of CCA.

However, that said, there are special rules for class 10 and class 10.1 vehicles ... each one a bit different.

This is a complex area of tax, my advice is to get help from your tax accountant.

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

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Taking Over the Books!

by Brennan
(Edmonton, AB)

Watch Out For Those Section 85 Rollovers

Watch Out For Those Section 85 Rollovers

My brother has his own contracting company installing windows which he started as a Sole Proprietorship and as of April 25, 2012 is now a Limited Company. I have been tasked (hired) to keep his books and adminstrative things in order.

I have some knowledge of Quickbooks and have been using it with a portfolio of over 30 condominiums for the company I am currently working for. However, condominiums are condisdered not for profit and therefore I do not have that much understanding of GST, Corporate Tax and Payroll.

I need some guidance on getting started off on the right foot with his company and want a few questions answered before I trek out into the great unknown (hopefully known soon enough!)

Here is the company's current state:

He has been filing his GST on a quarterly basis but his June 30 has not been filed yet as I am curious where to "start" his Quickbooks file off. And also the fact that he is now under a new BN GST number as of April 25 (half way through the reporting period). Do I file all the GST from April 1-24 as the Sole Proprietor and then file again from April 24-June 30 as the new Ltd. company? If so, should I essentially open his books for April 25 and record all his transactions from that point forward? I have all his bank statements printed off and wondering if I should enter all transactions since the 25th of April.

He has not been paying himself through a regular salary and has just been withdrawing as he needs personal funds. But now that I have taken over his finances I will be paying him a regular salary. My first question is what do I code all his "personal" withdrawls from the company? My second question is now with his regular salary I am setting him up on, should I be doing source deductions? Or just recording it as a Payroll Expense?

His current employee only has two weeks left before he is quitting and he plans to not hire another employee but contract one out. So is there a point in having him setup with payroll?

I know I shouldn't be so overwhelmed with this but it just seems like such a mountain I have before me..

Any recommendations or tips would be very greatly appreciated...and if this isnt considered a "free" question, please let me know as I'd like to even have a personal one-on-one with you to get the ball rolling.

I appreciate your response and thank you for your time reading my question(s).

P.S. I am so happy I stumbled across your accounting Garden of Eden!

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Hey Brennan,

The questions you are asking are complicated ... so here is my response to them in very general terms.

You have to be very very careful here and need to look at the Section 85 rollover rules ... which is advanced tax planning ... to ensure your brother gets a taxfree rollover from his sole proprietor business to his incorporated business.

I have two articles on section 85 rollovers for you to look at:

From Sole Proprietor to Corporation (see posting above); and

Transferring From Proprietorship to LTD (see posting above).

You are correct in that these are two separate sets of books which means you have to close out one set and start up a new set ... how you do that could have serious tax consequences, as mentioned above, if not done properly. You will need a new BN from CRA for the new business if you haven't done this yet.

You should be able to go ahead and file his Sole Proprietor GST report up to the last day he operated ... April 24, 2012. As these are two separate businesses, you should have received two separate GST reporting forms from CRA. They are mailed to the business in advance of the reporting deadline.

Don't forget, at some point you will have to close out your CRA accounts for the sole proprietorship.

Regarding payroll, you are going to have to take some time to read about owner manager remuneration. This is not straight forward topic. You can start by taking at looking at the following chat:

Bookkeepers Be Aware of The Rules -- Management Fees and Salaries for Incorporated Businesses.

Until you sort everything out, I would recommend your brother receive a regular salary and you remit monthly source deductions to CRA (see form PD7A). You must register with CRA for a payroll account.

Two forum posts you might be interested in are:

How To Pay Myself; and

Remittance on Shareholder Wages.

There are specific rules regarding Employees vs. Independent Contractors. Check out my chat on the topic so your brother doesn't inadvertently get into trouble. Take the time to go through the checklist to ensure your independent contractor meets CRA's criteria.

I do offer mentoring at $75/hour. We chat over the phone to answer your questions and if necessary, we "meet" online. Please send me a message through my site if you are interested in receiving more help.

TIP -- Don't forget to use the customized search boxes located throughout the site to find articles and chats on the subject you are looking for.

P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

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Aug 13, 2012
Shareholder Loans
by: Lake

Brennan, I've just finished catching up on some of my reading. One of the items I was browsing through was about shareholder loans ... I realized I forgot to address your reference to draws ...

There are NO DRAWS in an incoporporated company. Draws pertain to sole proprietorships and partnerships. Any money your brother removes from the company is generally subject to income tax.

It's important for your brother to understand that legally, the company has its own unique identity. The money/assets sitting in the company bank accounts are no longer his. Everything belongs to the company.

From a legal perspective, sole proprietors are the business so all monies/assets belong to the sole proprietor.

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