When to Incorporate Date Calculator
A short first tax year prorates the $500,000 small business limit by the number of days. Work out what your first year actually costs, how many T2 returns you will file in eighteen months, and the better date.
cost of the short year
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Your First Tax Year
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Incorporating Now Against Waiting
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Choosing the Year End
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Points That Decide This
What to Do Next
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Disclaimer: A corporation’s first taxation year begins on the date of incorporation and ends on the fiscal year end it chooses, which must not be more than 53 weeks after incorporation. The business limit for the small business deduction is $500,000 for a full taxation year and is prorated by the number of days in the taxation year divided by 365 where the taxation year is shorter than 365 days. Corporate tax is applied here at the Ontario combined rates of 12.2% on active business income within the prorated business limit and 26.5% above it. Personal tax on sole proprietor income is estimated using indicative Ontario combined marginal rates and does not reflect CPP contributions on self-employment earnings, personal credits or other sources of income. A T2 return is required for every taxation year regardless of activity or length, so a short first year produces an additional return and an additional preparation fee. Income earned by an individual before the corporation begins carrying on the business is that individual’s income and cannot be moved into the corporation by incorporating afterwards. Transferring existing business assets to a corporation is a disposition at fair market value unless an election under section 85 is made, which requires the prescribed form and has its own conditions and costs. A corporation is generally not required to pay instalments in its first taxation year but becomes subject to them where tax payable exceeds the threshold. The choice of fiscal year end has consequences for filing deadlines, instalment timing and the deferral available on salary or bonus arrangements, and should be made deliberately. This page is general information, not tax advice.
A Short First Year Shrinks the Small Business Limit
This is what nobody tells people incorporating in November. The five hundred thousand dollar business limit is for a full year. A short taxation year prorates it by days.
Incorporate on 15 November with a 31 December year end and your first year is forty-seven days. The limit for that year is not five hundred thousand dollars. It is about sixty-four thousand.
| First Year Length | Prorated Business Limit |
|---|---|
| 365 days | $500,000 |
| 180 days | $246,575 |
| 90 days | $123,288 |
| 47 days | $64,384 |
Income above the prorated limit is taxed at 26.5% rather than 12.2%. For most new corporations the first stub period is small enough that nothing exceeds the prorated limit and this costs nothing. Where the business hits the ground running, or where a large first contract lands in the stub, it matters.
You Also File an Extra Return
Every taxation year needs a T2, however short. A forty-seven day first year means a T2 for those forty-seven days and another for the following full year. Two returns in fourteen months.
That is a real fee for very little activity, and it is the cost most people notice rather than the prorated limit. Where the stub period has almost no income, that return is a pure administrative expense.
You Choose the Year End, and It Need Not Be December
A corporation’s first taxation year can end on any date up to fifty-three weeks after incorporation. That is a genuine choice and most people do not realise they have it.
Incorporating on 15 November and choosing 31 October the following year gives a first year of about three hundred and fifty days. Nearly the full limit, one return, and no stub period at all.
The year end is the free lever here. Rather than delaying incorporation to avoid a short year, choose a year end that makes the first year long. That gets you the corporation now and avoids the stub period entirely.
Income Before Incorporation Stays Yours
A corporation cannot earn income before it exists. Work you invoiced personally in October is your personal income, and incorporating in November does not move it.
That is why the date of the first corporate invoice matters. Incorporating before a large contract starts is what captures it. Incorporating after it is billed does not, no matter how close the dates are.
If a big contract is coming, incorporate before it starts, not after. This is the one timing consideration that genuinely creates urgency, and it works in the opposite direction to the short-year problem. Where the two conflict, the contract usually wins.
When the Timing Question Does Not Matter
- A client requires a corporation to award the contract. Incorporate now.
- Liability exposure is the concern. Incorporate now.
- A large contract starts next month. Incorporate before it starts.
- You will spend everything you earn. The deferral does not exist for you, so the date barely matters.
The timing analysis only really matters where the reason for incorporating is tax deferral and there is no external deadline. In that case waiting a few weeks for a clean start can be worth it.
Rolling In Existing Assets
Where the sole proprietorship has equipment, goodwill or receivables, transferring them to the corporation is a disposition at fair market value unless a section 85 election is made.
That election has its own form, conditions and cost, and it is worth planning rather than discovering afterwards. A business with real assets should not simply start invoicing through a new company and sort the transfer out later.
The Deferral Is Only on Retained Earnings
Worth restating because it is the thing people most often get wrong about incorporating. The saving comes from the gap between the small business rate and your personal rate, and it applies only to money left in the company.
A sole proprietor earning one hundred and fifty thousand who needs one hundred and forty to live on gets very little from incorporating, whatever date they pick.
Pick the year end at the same time as the incorporation date. Our incorporation service covers the date, the year end, the share structure and the first year of filings.
What This Calculator Does Not Cover
- Your personal tax on salary or dividends taken out
- CPP on self-employment earnings as a sole proprietor
- The section 85 election mechanics and cost
- Whether to incorporate at all, which is a separate question
- HST registration timing on the change of entity
- Provinces other than Ontario
Frequently Asked Questions
Common questions on timing an incorporation.
Related Calculators and Guides
More tools for the incorporation decision.
Pick the Date and the Year End Together
Tell us when you want to start and what is coming. We will set the incorporation date and the first year end so you avoid a stub period, handle the articles and the CRA accounts, and file the first year properly.