Incorporating an existing business is a sale to your own company
The move is legally a sale, and that is the whole reason tax is in the picture. After years of operating unincorporated, the business's assets, equipment, inventory, receivables, and above all goodwill, belong to you personally, and the new corporation is a separate person buying them. Because you and your corporation are not at arm's length, the tax rules treat the transfer as happening at fair market value no matter what price you write down, so a business worth more than its tax cost produces a personal gain in the year of the move. For a brand-new venture with nothing appreciated, that is harmless. For a business that has been running and profitable for years, it is a tax bill for moving your own property across the hall.
The irony is that the businesses most ready to incorporate are the ones most exposed to this. The usual trigger for incorporating after years of operating unincorporated is success: profits have grown past what the household spends, and the corporate structure's 12.2% Ontario rate on the first $500,000 of active income, against personal rates that climb past 50%, finally justifies the overhead. But those same profitable years are what built the goodwill, so the reward for waiting is a business genuinely worth something, and a taxable gain for moving it. The election is how you collect the first without paying for the second.
Section 85 of the Income Tax Act exists precisely for this situation. It lets you and the corporation jointly elect a transfer price, the elected amount, anywhere between the property's tax cost and its fair market value, and for most assets you elect at cost so no gain arises at all. The corporation inherits the property at the elected amount, and the gain is deferred, not erased: it resurfaces if the corporation sells the assets, or when you sell the shares you took back. What the election requires, mechanically, is that the property be eligible, that you take back at least one share of the corporation, and that the election be filed on the prescribed form by its deadline. The rules in full, limits, boot, share consideration, live on what is a section 85 rollover.
Not every incorporation needs the election, and knowing whether yours does is the first real question. A consultant with a laptop, no inventory and a practice that would not survive their departure may have little transferable goodwill and nothing appreciated, in which case the corporation can simply start fresh and buy the trivial assets for cash. The line between that case and yours is covered on when is a section 85 election required; the honest rule of thumb is that years of operation, an established name, recurring customers or a sellable book of business mean goodwill, and goodwill means the election earns its fee.
Inventory the business first: each asset moves under its own rule
Before any form gets filled in, list everything the business owns and owes, because the assets do not all travel the same way. Some need the election, some are better handled outside it, and some should not move at all:
| Asset | How it moves | Watch for |
|---|---|---|
| Goodwill: name, client base, reputation | Under section 85, usually at a nominal elected amount, since its cost is typically nil | The reason the election exists; needs a supportable fair market value |
| Equipment and vehicles | Under section 85 at tax cost where value exceeds it | Elected amount floors for depreciable property; potential recapture if done wrong |
| Inventory | Under section 85, or sold at value if cost and value are close | Consistency with your final unincorporated year's closing numbers |
| Accounts receivable | Often better under a separate section 22 election than section 85 | Preserves full deductibility of future bad debts; has its own form and conditions |
| Cash | Does not need an election; contribute or lend as you choose | Lending it in creates a balance you can withdraw tax-free later |
| Business real estate | Can roll under section 85, but deserves its own analysis | Land transfer tax has no general relief; the mortgage and the lender come too |
| Personal-use assets | Usually should not move | Putting the family vehicle in the company buys a taxable-benefit problem |
Goodwill dominates the exercise in most owner-managed incorporations, and it is also the asset people forget they own. Its fair market value is essentially what a buyer would pay for the business beyond its hard assets, and CRA can challenge a number that looks invented, so the valuation should be supportable, from earnings, comparable sales or a professional opinion scaled to the business's size. Standard practice pairs the election with a price adjustment clause in the transfer agreement, so that if CRA later revalues an asset, the deal self-corrects instead of collapsing the deferral.
Liabilities get inventoried with the same care, because the corporation will assume the business's debts, the operating loan, the supplier balances, the equipment financing, and each assumption is part of what the corporation pays you. That price tag has consequences, which is where the next section picks up. Lender consent belongs on the checklist here too: debts do not move just because a tax form says so, and banks expect to re-paper facilities in the corporation's name, usually with your personal guarantee following along.
Liabilities and boot: where the deferral gets broken
The commonest way to wreck this move is to have the corporation assume debts, or pay you anything other than shares, worth more than the tax cost of what you transferred. Everything you receive besides shares is called boot, and assumed liabilities are boot. The rule is mechanical: the elected amount for a property cannot be below the boot allocated to it, so if the boot exceeds the property's cost, the elected amount is forced above cost and a gain is triggered, election or no election. A business with healthy debts and low-cost assets, which describes many service businesses, walks straight into this unless the consideration is designed first.
Goodwill makes the trap concrete. Its cost is usually nil, so any debt allocated against goodwill forces a gain on it immediately. The design answer is allocation and mix: assume debts against assets that have cost to absorb them, cash-basis receivables, inventory, equipment, and take back shares, not boot, for the goodwill. Where the debts are simply too large for the asset costs available, the options are to leave some debt outside the corporation, repay some before the transfer, or accept a measured gain on purpose, and that choice should be arithmetic done in advance, not a surprise in the return.
Boot is not the enemy, though; used deliberately, it is one of the rewards of doing this properly. Taking back a promissory note up to the cost of the assets transferred gives you a balance you can draw out of the corporation tax-free for years, alongside your salary and dividend planning. The share consideration matters too: the shares you take back should be issued with the paperwork, classes and stated values that match the election, because sloppy share terms are the other classic way these files fail review. The wider family of traps, and how planners keep clear of them, is walked through on section 85 rollovers explained for business owners.
The paperwork: T2057, the HST election and the accounts that must move
The election itself is form T2057, filed jointly by you and the corporation, and its deadline is the earliest date on which any party to the election has to file an income tax return for the year of the transfer, in practice, usually your own personal filing deadline for the year you incorporated. The form records each property, its fair market value, its cost and the elected amount, with the consideration received. Late filing is possible for up to three years with a penalty that grows by the month, and CRA has discretion beyond that, but a deadline this knowable should simply be met. The transfer agreement, the corporate resolutions and the share issuance all need to exist and agree with the form, because the election documents a transaction that must actually have happened.
HST has its own, separate election, and forgetting it is expensive in cash flow terms. The sale of a business's assets is a taxable supply, so without relief you would charge yourself HST on the whole transfer and wait to recover it. Where the corporation acquires all or substantially all of the assets needed to carry on the business, you and the corporation can jointly elect, on form GST44, to have no HST apply to the transfer. The corporation must be registered before the election works, so the sequence is: incorporate, register, then transfer.
The corporation's opening books are set by the election, and they should be built from it, not from habit. Each asset comes on at its elected amount for tax, the shareholder loan from any note you took back is recorded so your tax-free drawing capacity is visible, and the share capital reflects what the legal paperwork actually issued. An accountant opening the corporate file from the T2057 gets all of this right in an afternoon; a bookkeeper opening it from the old sole-proprietorship trial balance bakes in differences that surface, expensively, at the first year-end.
The administrative tail is unglamorous and matters for months afterward. The corporation gets its own business number, corporate tax account, HST account and payroll account; employees move to the corporation's payroll with their service continuity preserved; insurers, key contracts and licences get novated or reissued in the corporate name. Your final unincorporated filings close the old life: business income to the transfer date on your personal return, and your old HST account wound down once the last return is filed. From the transfer date forward, the discipline that matters most is behavioural: the business's money is now the corporation's, and personal spending from the company account creates shareholder-loan problems that undo the tidy start.
What changes the plan, and how the project actually runs
Five facts decide how much design this move needs, and a fifteen-minute conversation usually surfaces all of them. How much the goodwill is really worth, because that sets both the stakes and the valuation effort. How the business's debts compare with the tax cost of its assets, because that is the boot constraint in one line. Whether you are HST-registered and current, because the GST44 election and the account changes hang off it. What the timing should be, since incorporating at your fiscal cut-off keeps the final unincorporated year clean and gives the corporation a deliberate year-end. And what the corporation is for, because a structure built for income smoothing and an eventual sale, where the lifetime capital gains exemption may one day matter, deserves share terms designed for that future, not boilerplate.
The long-game detail worth knowing now: shares received on incorporating a business you already ran get favourable treatment under the capital gains exemption's holding-period tests, so a future sale is not automatically pushed back by the fact that the shares are new. Whether your shares will ultimately qualify depends on the usual asset tests from here forward, which is one more reason to keep surplus cash from accumulating unplanned in the new corporation from year one.
There are also situations where the honest advice is not to bother with the election: losses available to absorb any gain, a business with genuinely no appreciated assets, or numbers small enough that the professional fees exceed the tax deferred. Part of the value of asking a corporate reorganization and tax planning CPA in Ontario is hearing that answer when it applies, priced at a conversation rather than a project.
When the election is warranted, the project has a fixed shape: value the assets, design the consideration around the boot limits, paper the transfer with your lawyer, file T2057 and GST44 on time, and set up the corporation's accounts and payroll so the first corporate year starts clean. We run it as a defined-scope engagement under Strategic Projects, usually alongside the incorporation work itself, with the scope and fee in writing after a free 15-minute discovery call. The one thing not to do is incorporate first and think about the transfer later; the order of these steps is most of the protection.
