Can I Change My Business Structure?
A licensed Ontario CPA explains how to change from sole proprietor to corporation and back, what a section 85 rollover does, why the transfer matters more than the incorporation, the accounts and contracts that do not follow you, and the mistakes that turn an administrative change into a tax bill.
Quick Answer
Yes, and it is common. Sole proprietor to corporation is the usual move, and a section 85 rollover generally allows the transfer without triggering immediate tax where the conditions are met. But changing structure is a real transaction, not a form. Transfer assets without the election and you can be treated as selling them at fair market value, personally, with no cash to pay the tax.
The Change Is Not the Incorporation
Owners think of this as incorporating. Incorporating is the easy part, and it is not where the risk is. Incorporating creates a new corporation, which is a new legal person that exists from that moment forward with nothing in it.
The actual change of structure is the transfer: moving your existing business, its assets, its goodwill, its contracts and its banking, out of you personally and into that new corporation. That transfer is a transaction between two separate taxpayers, and the tax system treats it as one. This is the part that needs planning, and it is the part that gets skipped because the incorporation certificate arrives and it feels like the job is done.
Here is the failure that costs the most. Transfer property to your corporation without a valid election and you are generally treated as having disposed of it at fair market value. That can trigger a capital gain, recapture of depreciation, or both, personally, in that year, on a transaction where you received no cash. The structure looks correct on paper and a tax bill arrives that nobody planned for.
What a Section 85 Rollover Does
Section 85 of the Income Tax Act allows you to transfer property to a corporation on a tax-deferred basis in exchange for shares of that corporation. It is the mechanism that makes incorporating an existing business possible without paying tax on gains that have accrued while you built it.
The deferral is real but it is conditional. There are requirements about what can be transferred, what consideration you take back, and the amount you elect at. There is a joint election that has to be filed, and it has a deadline tied to the returns of both parties. Late filing is possible only with penalties, if at all. None of this happens automatically, and none of it happens because your incorporation was done properly.
Not everyone needs one. If your business has no meaningful assets with accrued value, no equipment worth transferring and no goodwill to speak of, you can often simply incorporate and begin operating in the new company. The rollover matters when there is value in the existing business that would otherwise be treated as disposed of at fair market value. The mistake is assuming a service business has no value to transfer, because goodwill is property too.
What Follows You and What Does Not
This is the section worth reading closely, because almost everything here surprises somebody. When you incorporate, the corporation is a new legal person. Very little transfers automatically.
| Item | Does It Follow? | What Actually Happens |
|---|---|---|
| Business Number | No | New legal entity, new BN, new program accounts |
| GST/HST registration | No | Your RT account was yours personally. The corporation needs its own. |
| Payroll account | No | New RP account. Your staff now work for the corporation, which may require ROEs for the change of employer. |
| Trade name | No | Registered to you, not the corporation. The corporation needs its own name or registration. |
| Contracts with clients | No | Signed by you personally, they remain yours until assigned or replaced |
| Bank account | No | The corporation needs its own. The money now belongs to a different person. |
| Assets and equipment | Only by transfer | A disposition unless rolled over under an election |
| Goodwill | Only by transfer | Property with value. Often the largest item in a service business. |
| Unfiled returns and tax debt | Yes, they stay with you | Incorporating does not close your personal history |
The bank account is the one that quietly does the most damage. Revenue for the corporation landing in your personal account is not a bookkeeping inconvenience; it is money belonging to the corporation sitting with the shareholder, which is a shareholder loan with real tax consequences if it is not cleared. Weeks of this after incorporation is common, because the new account is not open yet and the invoices are already out.
The Transition Date
There has to be a clear date on which the business stops being carried on by you and starts being carried on by the corporation. Not roughly, and not whenever the paperwork caught up. Two taxpayers cannot both be earning the same income, so a fuzzy transition means income that neither return can cleanly report.
In practice this is where the mess lives. Clients keep paying the old entity. Invoices go out in the old name for another month. Expenses run through the personal card because that is what has always happened. Each one is small and each one has to be untangled later by someone deciding, after the fact, which taxpayer that transaction belonged to. Setting the date deliberately and communicating it costs nothing. Reconstructing it afterwards is not free.
Going Back Is Not the Same as Going In
The asymmetry here matters and it is rarely explained before someone incorporates. Getting into a corporation can generally be done on a tax-deferred basis with a section 85 rollover. Getting back out generally cannot.
Winding up a corporation to continue personally is a taxable event. Assets come out at fair market value. There can be deemed dividends. Final returns are required, and the CRA accounts have to be closed properly rather than abandoned. So the decision to incorporate is not a reversible experiment with a small setup fee. It is a door that is much easier to walk through than to walk back out of, and that alone is a reason to be sure the change is warranted before making it.
Should You Change at All?
Before the mechanics, the honest question. Incorporation helps when you retain earnings in the company, because the corporate rate on active business income is meaningfully lower than personal rates. If you take all the profit out personally, the integration of the corporate and personal systems means you end up in broadly the same place, having paid for a corporation to get there.
- Your business is consistently profitable, not occasionally
- You do not need all of the profit personally, so earnings can stay in the company
- The business carries real liability exposure: contracts, staff, physical operations, professional risk
- You want the business to exist separately from you, for a sale, a partner or succession
- The ongoing cost of a corporation is comfortably smaller than the benefit you have identified
- Your existing filings are current, so you are not incorporating on top of an unfiled history
If you spend everything you earn and carry little risk, incorporation adds cost and filings for benefits you cannot use. There is no prize for incorporating early. The structure should follow the need, and the need is usually retained profit or real exposure. We would rather tell you to wait than sell you a corporation you will be filing returns for every year without benefit.
Sole Proprietor to Corporation: The Order of Operations
The sequence matters as much as the steps. Doing these out of order is what creates the problems above.
| Step | What Happens | Why the Order Matters |
|---|---|---|
| 1. Decide whether to change at all | Assess retained profit, risk and cost | Everything after this is expensive if the answer was no |
| 2. Get existing filings current | Sole proprietorship returns and tax up to date | Incorporating on an unfiled history compounds it |
| 3. Plan the transfer | What is moving, what it is worth, the election, the transition date | The plan has to exist before the transaction, not after |
| 4. Incorporate | NUANS, Articles, share structure, minute book | The share structure has to match the rollover plan |
| 5. Open CRA accounts | New BN, plus RC, and RT and RP where needed | Before you invoice with HST or run payroll, not after |
| 6. Open the corporate bank account | In the corporation's name | Before revenue starts arriving, or it lands in a personal account |
| 7. Execute the transfer | Assets and goodwill move; the election is filed on time | The election deadline is tied to the returns and is unforgiving |
| 8. Transition contracts and clients | Assign or replace agreements, invoice from the corporation | A clean date, so two taxpayers are not earning the same income |
| 9. Final personal reporting | The proprietorship's final period reported on your return | The old business does not simply stop existing for tax |
Other Changes You Might Mean
| The Change | Possible? | What Is Involved |
|---|---|---|
| Sole proprietor to corporation | Yes, commonly | Incorporate, then transfer, generally with a section 85 election |
| Partnership to corporation | Yes | Rollover provisions exist, but multiple parties each with their own tax position |
| Corporation back to sole proprietor | Yes, but taxable | Wind up: assets out at fair market value, possible deemed dividends, final returns |
| Ontario corporation to federal | Yes | A continuance. The entity survives; the issuing registry changes. |
| Adding a holding company above your opco | Yes | A reorganisation, generally with tax-deferred provisions where conditions are met |
| Changing your fiscal year end | Sometimes | Generally needs CRA approval and a valid business reason. Not for deferral. |
| Changing your corporation's name | Yes | Registry filing. Simple, and not a change of structure at all. |
Get Current Before You Change
One last point that comes up more than it should. If you have unfiled returns or unpaid tax from the sole proprietorship, incorporating does not close that history. Those obligations stay with you personally, the final period of the proprietorship still has to be reported, and incorporating on top of an unfiled record compounds the problem rather than resolving it. Please get current first. Our past account clean-up service exists for exactly this, and it should come before the structure change, not after.
Case Study: Incorporated First, Asked Later
An Ontario consultant with an established client base incorporated online over a weekend, because it seemed straightforward and the fee was small. He moved his equipment and his client relationships into the company and carried on. Nobody filed a section 85 election, because nobody was involved who would have known to. He also assumed a service business had nothing to transfer, not realising goodwill is property. Meanwhile his clients kept paying his old account for two months, creating a shareholder loan nobody was tracking, and he charged HST for six weeks under a registration that belonged to him personally rather than to the corporation. We were engaged the following spring, when the pieces had to be untangled at once: the transfer position addressed, the shareholder balance cleared, the HST registration corrected, and the transition date established after the fact from bank records. All of it would have been straightforward with a conversation beforehand. The figures here are illustrative of the work we do, not a specific client file. Incorporation Services →
Plan the Change Before You Make It
Incorporating takes a weekend. The transfer, the election, the accounts and the transition are where the money is won or lost. We handle all of it, and we will tell you first whether the change is worth making. Flat fee, including HST.
Should You Change?
Whether you have retained profit and real exposure, or whether incorporating adds cost for benefits you cannot use yet.
The Transfer
Tax analysis, rollover planning and the election, working alongside corporate counsel on the documents.
The New Entity
Business Number, GST/HST and payroll accounts opened, transition date set, and filings running from day one.
Frequently Asked Questions on Changing Your Business Structure
Thinking of Incorporating? Talk to Us First, Not After.
Gondaliya CPA tells you whether the change is worth making, plans the transfer properly, and sets the new entity up so your first year does not start with a problem. Flat fee, including HST. 1300+ five-star reviews.