you receive your Canada Revenue Agency business number, which will look something like 12345 6789 RP0001, the number for your corporate remittances will look something like 12345 6789 RC0001. (The two numbers will be identical, differentiated only by the RP, RT, or RC program accounts.) You do not need to make corporate remittances in the first year, but you are required to make payroll remittances. It is important to note that enrollment for payroll and/or HST accounts is not automatic—this is something your accountant will be able to help you with.
Employment Contracts
Upon incorporating, a new written contract will need to be created for the new employee/employer relationship you'll be entering into as an employee of your professional corporation. Additional contracts for your spouse, children, and any other employees will also need to be developed. Establishing written contracts may be important for future reasonability reviews, given the new tax on split income rules (more on that later).
Transferring Assets
When you incorporate, you should consult with your accountant and/or financial advisor about which assets, if any, need to be and/or should be transferred to the corporation. (Keep in mind you are, in fact, selling your practice to your corporation.)
You can transfer assets, including goodwill (an intangible asset that's made up of the value added by your reputation and customer lists to the value of your practice), tax-deferred to your corporation by filing an election with the Canada Revenue Agency—called a “section 85” election, as the rules are set out in section 85 of the Income Tax Act. This election will ensure you avoid having to pay taxes if the fair market value (FMV) of your assets exceeds their adjusted cost base (ACB).
While the greatest benefit of the section 85 election is to transfer eligible property on a tax-deferred basis (at the lower of cost or the undepreciated capital cost) to a taxable Canadian corporation, there is an opportunity to trigger a gain if it is beneficial to the individual's circumstances. Also, whether the transfer is tax-deferred or not, it is nevertheless a disposition and must be reported on the transferor's tax return.
Before you transfer any other assets to the corporation, such as real estate or insurance policies, a careful cost–benefit analysis should be carried out. The following are some high-level considerations.
Real Estate
An individual can simply sell an existing rental property to their corporation in exchange for assets or debt, but the sale would trigger any unrealized capital gains, as well as a possible recapture of any capital cost allowance previously claimed on the rental property in the hands of the individual.
An individual may also transfer personally held assets to a corporation on a tax-deferred basis by taking back shares (and possibly debt) of the corporation in exchange for the property. The value of the shares received would reflect the value of the property transferred to the corporation. Then, when the property is eventually sold by the corporation, any accrued capital gains would be taxable to the corporation and distributed to the shareholder, likely in the form of dividends.
There are other factors that would need to be considered as well before assets are transferred to the corporation. For example, in the case of real estate, you would be required to pay a land transfer tax if the property is not used for the active business of the corporation. While I have seen some lawyers work around these issues using a trust structure, it's best to assume these taxes are to be paid. It is also important to determine whether the goods and services or harmonized sales tax (GST or HST) applies.
It should be noted that some real estate transactions do avoid land transfer taxes. These include gifts for no consideration (including no assumption of a mortgage). Although the tax is triggered and a tax return should be filed, as the tax is based on the consideration, the actual amount of the tax will be nil (as the consideration is also nil).
Insurance Policies
If you're thinking about transferring a personally held insurance policy to your corporation, you need to proceed with great care, specifically comparing:
The corporate savings of the corporation paying the insurance premium (note that life insurance premiums are not a deductible expense unless specifically required as part of collateral on debt) minus the income tax due on the cash surrender value (CSV) minus the adjusted cost base (ACB) at the transfer; and
The cost of paying a lump-sum bonus this year so that, after personal income tax, you have enough remaining to pay the tax due on the taxable income.
While the March 2016 federal budget reduced the benefits of transferring insurance policies to a corporation, it recommended that consideration which is at least equal to the higher of the CSV and the ACB of the policy be paid. If this recommendation is implemented, the policy's new ACB will be the highest of the following amounts: the value of the policy (CSV), the fair market value of the consideration paid, and the ACB. This new ACB will affect the taxation of the insurance plan. If the policy is surrendered before death, there is a gain to the extent that the CSV exceeds the ACB. On death, any life insurance proceeds received, assuming the corporation is the beneficiary, are added to the CDA account, and can be paid out as a tax-free capital dividend.
Choosing Your Corporation's Year-End and Maintaining Your Corporate Records
Once you are incorporated, you will need to designate a fiscal year-end for your corporation. If you're looking to keep things simple, choose a corporate year-end of December 31, the same as your personal tax year-end.
There can be some advantages, however, in choosing an off-calendar year-end. For example, with an off-calendar year end of July 31 or later, you would be able to defer paying taxes for up to 179 days. This means you could declare a bonus in the company fiscal (non-calendar) year, but not actually take the money into (taxable) personal income into the following (calendar) year.
Your professional corporation will file its own return and pay its own taxes. The corporation's tax returns are due six months after your designated corporate year-end, but the final balance of any tax owing is due two to three months after your corporate year-end.2 As you will now be an employee of the corporation, and no longer a self-employed individual, your personal taxes will be due by April 30—and not the deadline of June 15 granted to self-employed individuals and their spouses.
A mistake that's often made in the first year of incorporation is failing to file for dividends, recorded on T5 slips, by February 28 of the following year. This oversight will result in a late fee of the greater of $100 or $10 per day.3 February 28 (or 29 in a leap year) is also the date for filing T4 slips. You will need to keep your company records for at least seven years—including invoices, receipts, cheques, and documentation of your salaried employees' duties and hours worked.4
When Does It Not Make Sense to Incorporate?
Although there are powerful potential benefits to incorporating your professional practice, there are also some (limited) situations in which it is advisable not to incorporate.
If you are retired and have no intentions of ever working again, ever,
