Sole Proprietorship to Corporation Transfer Cost Calculator
Moving an established business into a corporation is a sale to yourself at fair market value, and the goodwill you built is taxable. Work out the tax bill without an election, what a section 85 rollover saves, and whether you need one at all.
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What Transferring at Market Value Would Trigger
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The Boot Test
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The Three Elections
| Election | What It Does | Applies to You |
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What It Costs to Do Properly
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Points That Decide This
What to Do Next
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Disclaimer: Transferring business assets to a corporation is a disposition at fair market value between non-arm’s length parties. Subsection 85(1) allows a joint election on Form T2057 to transfer at an elected amount, generally between the tax cost and fair market value, deferring the gain. Consideration must include at least one share of the corporation. Non-share consideration, known as boot, that exceeds the elected amount triggers an immediate gain. Self-created goodwill has a nil capital cost, so the full value is a capital gain on a market value transfer, of which half is taxable. Depreciable property produces recapture to the extent proceeds exceed undepreciated capital cost, up to the original cost, and a capital gain above that. Personal tax uses 2026 federal and Ontario brackets with the surtax and approximate basic personal amounts. The T2057 is due by the earliest of the parties’ filing due dates, with late filing permitted within three years on payment of a penalty. Section 22 covers accounts receivable and section 167 covers the HST treatment, and both require separate joint elections. This page is general information, not tax advice.
Incorporating an Established Business Is a Sale to Yourself
Starting a new business in a corporation costs nothing in tax. Moving an existing one into a corporation is a disposition at fair market value, and the value you have spent years building becomes taxable on the day you transfer it.
The largest item is almost always goodwill. Self-created goodwill has a nil capital cost, so the entire value is a capital gain. Half of it is taxable, at your marginal rate, in the year of transfer.
On a business with $250,000 of goodwill and $35,000 of recapture on equipment, transferring at market value produces a tax bill of about $76,000. No money has changed hands, no customer has left, and nothing about the business has changed. It is a tax bill on a transaction with yourself, and it is entirely avoidable.
What a Section 85 Rollover Does
Subsection 85(1) lets you and the corporation jointly elect on Form T2057 to transfer assets at an agreed amount rather than at market value. Elect at the tax cost and no gain arises. The gain is not forgiven, it is deferred into the shares you take back.
| Asset | Elected At | Result |
|---|---|---|
| Goodwill | Nil, its capital cost | No capital gain |
| Equipment | Undepreciated capital cost | No recapture |
| Accounts receivable | Face value, with a section 22 election | Handled on income account |
| Inventory | Cost | No income inclusion |
The Trap That Undoes the Whole Thing
Consideration from the corporation must include at least one share. Anything else you take back, whether cash, a promissory note or debt the corporation assumes on your behalf, is called boot.
Boot above the elected amount triggers an immediate gain, and it is the single most common way a rollover goes wrong. If your business carries $150,000 of debt but the tax cost of what you are transferring is only $65,000, the corporation assuming that debt creates an $85,000 excess and a gain you thought you had deferred.
The fix is usually to structure what the corporation assumes, and to take more of the consideration in shares rather than in debt. That has to be decided before the transfer, not discovered when the return is prepared.
There Are Three Elections, Not One
| Election | Form | What It Covers |
|---|---|---|
| Section 85 rollover | T2057 | Defers the gain on the assets transferred |
| Accounts receivable | Section 22 | Keeps receivables on income account, so you deduct the shortfall and the corporation includes it |
| Sale of a business | GST44, section 167 | Removes HST from the transfer where both parties are registrants |
Missing the section 167 election means HST on the taxable assets. Where you are both registrants that is a cash flow problem rather than a permanent cost, but on a large transfer it is a substantial amount to fund and then reclaim.
Deadlines and Late Filing
The T2057 is due by the earliest of the filing due dates of the transferor and the corporation for the year the transfer happened. In practice that is usually your own personal return deadline.
A late election is permitted within three years on payment of a penalty, calculated at $100 for each month late to a maximum of $8,000. Beyond three years it needs the Minister to accept that filing would be just and equitable, which is discretionary and not something to plan around.
Sometimes You Do Not Need One
A rollover is not automatic and not always worth it. If you are a consultant with a laptop, no meaningful goodwill and no equipment carrying recapture, there is nothing to defer.
- A service business with no transferable client base may have goodwill that is genuinely personal to you rather than saleable.
- Equipment fully depreciated but nearly worthless produces recapture equal to almost nothing.
- A business worth roughly its book value can be transferred at market value with no consequence.
- Where the values are small, the election fee can exceed the tax it saves.
In those cases the simpler answer is to incorporate and simply start operating through the corporation, leaving the old assets where they are or transferring them at cost.
What Happens to the Old Business Number
A sole proprietorship and a corporation are different persons for tax purposes. The corporation needs its own business number and its own HST and payroll accounts, and the proprietorship accounts have to be closed properly rather than left dormant.
A final personal return covering the proprietorship period is still required, and the year of incorporation almost always involves both a stub period of self-employment income and a corporate year.
The Order to Do This In
- Value the business honestly, particularly the goodwill, because that number drives everything.
- Decide the consideration mix before anything moves, so the boot problem never arises.
- Incorporate and set the year end deliberately.
- Document the transfer with an asset transfer agreement listing each asset and its elected amount.
- File the T2057 by the earliest filing deadline, along with the section 22 and section 167 elections.
- Close the proprietorship accounts and open the corporate ones.
What This Calculator Does Not Cover
- Inventory and work in progress, which have their own treatment
- Real property, which brings land transfer tax into the picture
- The lifetime capital gains exemption, which can occasionally make a market value transfer attractive
- Paid-up capital planning on the shares taken back
- The stub period return for the proprietorship in the year of transfer
- Provinces other than Ontario
The consideration mix has to be decided before the transfer, not after. Almost every failed rollover we see was structurally fine except for the boot. Our section 85 rollover service covers the valuation, the agreement and all three elections.
Frequently Asked Questions
Common questions from sole proprietors incorporating.
Related Calculators and Guides
More tools for incorporating an existing business.
Decide the Consideration Before Anything Moves
Send us a list of what the business owns and what it owes. We value the goodwill, set the elected amounts, structure the consideration so no boot problem arises, and file all three elections on time.