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Changing business structure in Canada, say from sole proprietor to corporation, creates a new taxpayer. So you don’t just rename the business: the CRA wants a new business number, your old accounts close, and your books need a clean cutoff on the day the assets move.
What changes in the books when a sole proprietor incorporates?
Before the move, business income is yours. You report it on your own return and pay tax on it personally. After the move the corporation owns the business, pays its own tax and keeps its own set of books.
That means a closing balance sheet on the transfer date. List what goes across: equipment, inventory, receivables, the bank balance, and any debts the corporation takes on. Each item needs a value, and the value you pick matters for tax.
Then open a new ledger and bank account in the corporation’s name. Mixing old and new on one account is how a tidy switch turns into a mess at year end.
Say Dana runs a landscaping business in Kelowna and incorporates on June 30. Her sole proprietor books end that day, with a final set of numbers that go on her personal return. From July 1, every invoice, fuel receipt and payroll run belongs to the corporation. A customer who pays an old invoice in August still has to be dealt with, so decide up front whether those receivables move across or stay with her.
How does the section 85 rollover work?
Moving property to a company is a sale in the eyes of the tax law, and a sale can trigger income or a gain. Section 85 of the Income Tax Act lets you defer that. You and the corporation file a joint election, form T2057, and agree on an amount for each property transferred.
One rule to remember: what you get back from the corporation has to include at least one share, or the election isn’t valid. The forms also ask for the fair market value of what you transfer and of any non-share payment you take.
Timing is the part people miss. The CRA deadline for T2057 (and T2058, the partnership version) is the earliest date that any party to the election has to file an income tax return for the year of the transfer. Late forms are accepted, but with a late-filing penalty, and T2057 can be filed within three years of the due date if you pay an estimate of the penalty with it.
| Step | What the CRA says |
|---|---|
| Register the corporation | Through the federal or provincial incorporating authority |
| New business number | Created for the corporation, often automatically, with a new corporation income tax account |
| GST/HST and payroll accounts | Not moved across on their own, register new ones on the new number if needed |
| Old business number | Close it, with its accounts |
| Joint election | T2057 by sole proprietors, T2058 by partnerships |
What if you change partners instead?
A partnership that keeps at least two partners doesn’t change legal status, so no business number needs closing. Converting a partnership into a corporation is different: it follows the same close-and-register steps as a sole proprietor. The election is the same idea, except the partnership files its own form, T2058.
What does incorporating do to the tax bill?
Here’s a number to think about. A sole proprietor in Ontario with $150,000 of net business income pays $47,642.32 in income tax and CPP, which is 31.8%, according to the self-employed tax calculator. Leave the profit in a corporation and the corporate tax calculator shows $17,544 of tax, an 11.7% rate, with $132,456 left inside.
That rate is a hedge, not a promise. Ontario lowered its small business rate on 1 July 2026, and for a calendar 2026 year the tool uses a prorated blend that we derived ourselves, not a published figure. A corporation with a different year end will come out differently.
And the $132,456 isn’t yours yet. The calculator leaves out the tax on paying money out to the owner. Take it as salary or dividends and personal tax arrives, so the dividend tax calculator is the next stop.
Deferral is a real benefit if you leave money in the business. If you need all of it to live on, the gap is much smaller.
What should you do first if you’re thinking about it?
Pick the transfer date with your year end in mind, since a move in the middle of a busy season means two sets of books at the worst moment. Ask your accountant for a ballpark of the tax on the rollover, and for the cost of getting incorporated and filing for a year. Then list every contract, lease, licence and vehicle in your name that has to be assigned or renewed. Some landlords and lenders need to say yes first.
Mistakes to avoid when changing structure
The expensive ones are quiet. Filing the election late. Assuming your GST/HST or payroll account carries over when the CRA says it doesn’t. Letting the corporation use your personal card for a few months. Forgetting that the corporation’s first fiscal year starts on its incorporation date, not on January 1.
Keep the paperwork: the agreement that moved the assets, the list of values, the share certificates, and copies of the election.
A corporate lawyer or accountant is worth paying for this one, because the agreed amounts lock in the tax result and are hard to change afterward.
The sources behind this page
The business number steps come from the CRA page on change of legal status, and the election rules from CRA Information Circular 76-19 and the T2057 form page. Our 2026 data and calculators supply the tax figures. The calculators do not model associated corporations, passive income rules or the taxable capital phase-out. This is an independent information site, not affiliated with the CRA.
Frequently asked questions
Do I need a new business number when I incorporate?
Yes. The CRA says a sole proprietor incorporating registers a new business number for the corporation and closes the old one.
Do my GST/HST and payroll accounts carry over?
No. The CRA says accounts on the old number aren't associated with the new one automatically, so register new ones if needed.
What is a section 85 election?
A joint election by you and the corporation, on form T2057, that defers tax on property moved to the corporation. You must receive at least one share.
When is form T2057 due?
By the earliest date any party to the election must file a return for the year of the transfer. Late filing carries a penalty.
Does adding or removing a partner change legal status?
Not if the partnership keeps at least two partners.
- Self-employed taxes in Canada: income, CPP and GST
How tax works when you are self-employed in Canada: reporting income and expenses, paying both halves of CPP, instalments and when to register for GST