From Sole Proprietor to Corporation: Unlock Tax Savings and Future-Proof Your Business with Expert Strategies

Imagine this: Your family-owned business, started as a small operation, has grown into a thriving enterprise. With new opportunities on the horizon, you start wondering how to protect your personal assets, reduce taxes, and position the business for future growth. Incorporating your sole proprietorship could be the solution—but where do you begin, and how do you navigate the complexities of tax laws without unnecessary pitfalls?

Transitioning from a sole proprietorship to a corporation is a transformative milestone for any business. This change can unlock numerous advantages, including limited liability protection, access to lower corporate tax rates, and better opportunities for succession planning. However, it’s not as simple as flipping a switch—it requires careful planning, compliance with Canada’s tax laws, and a clear strategy to maximize the benefits of incorporation.

As a trusted tax advisor specializing in corporate tax law and financial planning, I have helped countless family-owned businesses make this leap successfully. By leveraging Section 85 of the Income Tax Act (ITA), you can transfer your business assets into a corporation without triggering immediate tax liabilities. This blog will guide you through the process, breaking it down into manageable steps and offering real-world examples to illustrate the benefits.

Here’s what we’ll cover:

• The key differences between sole proprietorships and corporations and why transitioning might be the right choice for your business.
• The tax implications of incorporation and how Section 85 rollovers defer taxes while setting your business up for growth.
• The step-by-step process of rolling over assets, from valuation to completing the required forms.
• Real-life case studies showcasing how Shajani CPA has helped clients save taxes and achieve their business goals through incorporation.

If you’re ready to take your business to the next level, this blog is your comprehensive guide to navigating the transition smoothly and strategically. Let’s dive in!

 

Differences Between Sole Proprietorships and Corporations

Transitioning a business from a sole proprietorship to a corporation is a significant decision that requires a clear understanding of the fundamental differences between these two business structures. Each has distinct legal, financial, and operational implications, impacting liability, taxation, capital access, and continuity. This section provides an in-depth comparison to help business owners, particularly those in family-owned enterprises, make informed decisions.

1. Legal Structure

Sole Proprietorship: In a sole proprietorship, the business and its owner are considered a single legal entity. This simplicity allows for ease of setup and operation, as there is no legal separation between personal and business assets or liabilities. However, this structure has a significant drawback: the owner is personally responsible for all debts and obligations of the business. For example, if a sole proprietorship defaults on a loan, the creditor can pursue the owner’s personal assets, such as savings, real estate, or other investments, to recover the debt.
Corporation: A corporation is a separate legal entity, distinct from its owners (shareholders). This separation creates a “corporate veil,” shielding the personal assets of shareholders from business liabilities. Shareholders are only liable up to the amount they have invested in the company. This distinction provides significant advantages for risk management. If the corporation incurs debts or faces legal action, only the corporation’s assets are at stake, protecting the personal wealth of its shareholders.
Key Consideration: While the legal protections of incorporation are a strong advantage, corporate governance requires additional responsibilities, such as maintaining corporate records, filing annual returns, and adhering to regulatory compliance standards.

2. Tax Treatment

Sole Proprietorship: In a sole proprietorship, business income is reported directly on the owner’s personal tax return. This straightforward approach simplifies tax filing but can lead to higher tax rates as the business grows. For example, a sole proprietor earning $150,000 annually may be subject to marginal tax rates exceeding 40% (depending on the province). Additionally, sole proprietors have fewer opportunities for tax planning and income splitting, which can limit their ability to optimize after-tax income.
Corporation: Corporations are taxed separately from their owners, and the income is subject to corporate tax rates, which are generally lower than personal tax rates. For active business income under $500,000, the small business deduction (SBD) reduces the corporate tax rate significantly—often to 9-15%, depending on the province. Corporations also allow for tax deferral. Retained earnings can be reinvested in the business without triggering personal tax liability until dividends are paid to shareholders. This creates opportunities for long-term financial planning.
Example of Tax Efficiency: Consider a family business earning $200,000 annually. As a sole proprietorship, the owner would pay personal income tax on the entire amount. If incorporated, the first $500,000 of income could benefit from the SBD, significantly lowering the tax burden. Corporations also facilitate income splitting with family members, allowing shareholders (such as spouses or children) to receive dividends, thereby distributing income across lower tax brackets.
Key Consideration: While incorporation offers substantial tax advantages, it also involves additional costs, such as corporate tax filings and accounting fees, which should be weighed against potential savings.

3. Access to Capital

Sole Proprietorship: Sole proprietors rely on personal savings, loans, or lines of credit to fund their business operations. These limitations can hinder growth, especially for businesses requiring significant capital investments. Additionally, securing loans often requires personal guarantees, exposing the owner’s assets to financial risk.
Corporation: Incorporation opens doors to broader funding opportunities. Corporations can issue shares to raise equity capital, attracting investors who share in the company’s profits without assuming operational control. This makes it easier to finance expansion, invest in new technology, or enter new markets. Corporations may also have better access to bank loans and credit facilities, as lenders often perceive incorporated entities as more stable and reliable due to their formal structure and limited liability protections.
Key Consideration: Issuing shares dilutes ownership and control. Business owners should carefully evaluate the trade-off between raising capital and retaining decision-making authority.

4. Business Continuity

Sole Proprietorship: The lifespan of a sole proprietorship is directly tied to its owner. Upon the owner’s retirement, incapacitation, or death, the business ceases to exist unless explicitly transferred to a successor. This lack of continuity can disrupt operations, complicate succession planning, and reduce the business’s value as an asset.
Corporation: Corporations benefit from perpetual existence. As a separate legal entity, a corporation can continue operating regardless of changes in ownership or management. This makes incorporation an attractive option for family businesses seeking to transfer ownership to the next generation.
Example of Continuity: Incorporation allows for the issuance of growth shares, enabling parents to lock in the current value of the business while transferring future appreciation to their children. This structure not only facilitates intergenerational wealth transfer but also ensures business operations remain uninterrupted.
Key Consideration: To fully realize the benefits of business continuity, corporations must establish clear governance structures and succession plans.

Additional Considerations

Administrative Complexity: Sole proprietorships are simpler to establish and manage, with fewer regulatory requirements. Corporations require ongoing maintenance, including the preparation of annual financial statements, corporate tax filings, and shareholder agreements.
Credibility and Branding: Incorporation enhances credibility with clients, suppliers, and investors, signaling stability and professionalism. Sole proprietorships may be perceived as less formal, which could limit growth opportunities in competitive markets.
Costs: Incorporating involves upfront costs, such as registration fees and legal expenses. Ongoing costs include accounting, tax compliance, and corporate governance.

Why Consider Transitioning to a Corporation?

For many sole proprietors, incorporating represents a strategic move to unlock growth potential, manage risk, and optimize tax efficiency. The decision to incorporate should be guided by the following considerations:
Revenue Growth: If your business is generating significant income, incorporation can help reduce your tax burden and reinvest in growth.
Liability Protection: Businesses with higher risks, such as those operating in regulated industries, benefit from the limited liability of incorporation.
Succession Planning: Incorporation simplifies the transfer of ownership, preserving the value and continuity of your business.
Access to Capital: If you’re planning to expand, incorporating can attract investors and provide access to additional funding sources.

Conclusion

Understanding the differences between sole proprietorships and corporations is essential for making informed decisions about the future of your business. While sole proprietorships offer simplicity and direct control, incorporation provides a robust framework for growth, liability protection, and tax efficiency. For family-owned enterprises, transitioning to a corporation is not just a legal change—it’s a strategic step toward securing the financial future of your business. At Shajani CPA, we specialize in guiding business owners through this transition, offering expert advice tailored to your unique needs. Contact us today to learn how incorporation can unlock new opportunities for your business and help you achieve your long-term goals.

 

Understanding the Tax Implications of Transitioning

Transferring assets from a sole proprietorship to a corporation is a significant step in the evolution of a business, but it also comes with critical tax implications. The Canada Revenue Agency (CRA) generally treats such transfers as a sale at fair market value (FMV). This treatment can trigger taxable events, such as the realization of capital gains or the recapture of depreciation previously claimed on depreciable assets. Without proper planning, these tax liabilities can pose a financial burden, reducing the benefits of incorporation.

However, the Income Tax Act (ITA) provides a powerful tool for mitigating these tax implications: Section 85. This section allows business owners to transfer eligible assets to a corporation at their cost base, deferring the recognition of gains or recapture until a future taxable event, such as the eventual sale of the assets or shares. Understanding how Section 85 works and its potential benefits is essential for facilitating a smooth and tax-efficient transition.

Tax Implications Without Section 85

When business assets are transferred from a sole proprietorship to a corporation, the CRA views the transaction as if the sole proprietor has sold the assets to the corporation at their FMV. This deemed disposition results in:

• Capital Gains: The difference between the FMV of the assets and their adjusted cost base (ACB) is treated as a capital gain. Fifty percent of this gain is included in the proprietor’s taxable income under the current inclusion rate.
• Recapture of Depreciation: For depreciable assets like machinery or equipment, if the FMV exceeds the undepreciated capital cost (UCC), the difference is added to the proprietor’s income as recaptured depreciation.

For example, if a sole proprietor transfers equipment with a UCC of $10,000 and an FMV of $30,000, the $20,000 difference would be subject to recapture and included as taxable income.

This immediate tax liability can deter business owners from incorporating, particularly if the assets have significantly appreciated in value or if depreciation claims have been substantial.

How Section 85 Defers Tax Implications

Section 85 of the ITA provides a tax-efficient alternative, allowing eligible assets to be transferred at their ACB or UCC, rather than FMV. This election effectively defers the recognition of capital gains and recaptured depreciation until a future taxable event occurs.

The deferral mechanism is achieved by:

1. Electing an Agreed Amount: The transferor and the corporation agree on a transfer value (the “agreed amount”) that is between the asset’s ACB or UCC and its FMV. This agreed amount becomes the proceeds of disposition for the transferor and the cost basis for the corporation.
2. Issuing Shares as Consideration: In exchange for the transferred assets, the corporation issues shares to the proprietor. These shares represent the proprietor’s equity in the newly incorporated entity.

By leveraging Section 85, business owners can defer immediate tax liabilities, allowing the corporation to start with a clean slate while preserving cash flow for operations and growth.

Example: Tax Deferral in Action

Suppose a sole proprietor transfers the following assets to a corporation:

• Equipment: FMV $50,000, UCC $20,000.
• Goodwill: FMV $100,000, ACB $0.

Without Section 85:

• The equipment transfer would result in $30,000 of recaptured depreciation, added to taxable income.
• The goodwill transfer would trigger a $100,000 capital gain, half of which ($50,000) would be included in taxable income.

With Section 85:

• The proprietor and corporation agree to transfer the equipment at its UCC ($20,000) and the goodwill at its ACB ($0).
• No immediate tax liabilities are incurred, as the agreed amounts match the tax bases of the assets.

By deferring these tax implications, the proprietor avoids paying taxes on $130,000 of income and can focus on reinvesting in the corporation’s growth.

Benefits of Tax Deferral Under Section 85

1. Cash Flow Preservation: Avoiding immediate tax payments allows business owners to allocate resources toward operational needs, expansion, or strategic investments.
   2. Tax Optimization: By deferring gains and recapture, business owners have more flexibility to plan the timing of future taxable events, potentially taking advantage of lower tax rates or exemptions.
   3. Smooth Transition: Section 85 ensures a seamless transfer of assets into the corporate structure without disrupting cash flow or creating undue financial strain.
   4. Enhanced Planning Opportunities: The deferral mechanism facilitates estate planning, succession planning, and other long-term financial strategies, enabling business owners to preserve wealth for future generations.

Key Considerations When Using Section 85

1. Eligible Assets: Not all assets qualify for a Section 85 rollover. Eligible assets include capital property, depreciable property, inventory used in the business, and eligible capital property such as goodwill. Assets like cash or personal-use property are generally excluded.
2. Valuation Requirements: Accurate valuation of transferred assets is critical to ensure compliance with CRA guidelines. FMV assessments must be supported by documentation, such as professional appraisals or market comparisons.
3. Documentation and Filing: The Section 85 election is formalized by filing Form T2057, which details the agreed amounts and the consideration received. This form must be filed by the earliest tax return deadline of the transferor or the corporation for the year of transfer.
4. Future Tax Implications: While Section 85 defers taxes, it does not eliminate them. Business owners should consider how the deferred liabilities will impact future transactions, such as the sale of shares or corporate assets.

Why Professional Guidance is Essential

The process of transitioning a sole proprietorship to a corporation using Section 85 is complex and requires meticulous planning. Errors in asset valuation, documentation, or compliance with CRA regulations can result in unexpected tax liabilities, penalties, or denied elections. Engaging a tax professional with expertise in corporate restructuring ensures that:

• All eligible assets are identified and properly valued.
• The agreed amounts are strategically chosen to maximize tax efficiency.
• Filing deadlines are met, and documentation is accurate.

At Shajani CPA, we specialize in guiding family-owned enterprises through the intricacies of Section 85 rollovers, helping clients achieve seamless and tax-efficient transitions.

Conclusion

Understanding the tax implications of transitioning from a sole proprietorship to a corporation is critical for making informed decisions. While transferring assets at FMV can trigger significant tax liabilities, Section 85 of the ITA offers a practical solution to defer these taxes, preserving cash flow and facilitating growth. With careful planning and professional guidance, business owners can navigate this transition smoothly, setting their corporation on a path to long-term success. Contact Shajani CPA to explore how we can help you leverage Section 85 to achieve your business ambitions.

 

The Rollover Process: Key Steps to Incorporating

Transitioning from a sole proprietorship to a corporation using Section 85 of the Income Tax Act (ITA) is a strategic process that allows business owners to defer tax liabilities while laying the foundation for future growth. However, executing a Section 85 rollover requires careful planning and adherence to specific steps to ensure compliance with CRA guidelines and to maximize tax efficiency.

This section outlines the critical steps in the rollover process, from asset valuation to filing the necessary election, providing a roadmap for a seamless and tax-efficient transition.

1. Asset Valuation

Determining the fair market value (FMV) of all assets being transferred is the first and most crucial step in the rollover process. FMV represents the price an asset would fetch in an open market transaction between knowledgeable, willing parties.

Tangible Assets: These include physical assets like machinery, equipment, buildings, and vehicles. A professional appraisal ensures accurate FMV assessments, preventing disputes or reassessments by the CRA.
Intangible Assets: These are non-physical assets such as goodwill, trademarks, patents, and intellectual property. Intangible assets often account for a significant portion of a business’s value, making their accurate valuation critical.

Goodwill Valuation: Goodwill represents the intangible value of a business, encompassing factors such as brand reputation, customer loyalty, and proprietary systems. Determining the FMV of goodwill requires professional expertise, often involving the estimation of the business’s sale price to a third party minus the value of tangible assets. Proper documentation and adherence to CRA guidelines are essential to avoid challenges during audits.

Why Valuation Matters: Accurate asset valuation lays the groundwork for negotiating the agreed amount during the rollover. Overstating or understating FMV can lead to tax inefficiencies, CRA penalties, or complications in the corporation’s future transactions.

 

2. Identifying Eligible Assets

Not all assets qualify for a Section 85 rollover. Determining which assets are eligible is a critical step to ensure compliance with the ITA and to optimize the tax benefits of the transfer.

Eligible Assets Include:

• Capital Property: Long-term assets used in the business, such as land, buildings, machinery, and equipment.
• Inventory: Goods held for sale in the ordinary course of business.
• Eligible Capital Property (ECP): Intangible assets like goodwill, licenses, and trademarks.

Excluded Assets: Certain types of property are not eligible for rollover under Section 85, including:

• Cash.
• Accounts receivable.
• Personal-use property, such as personal vehicles or residences.

Key Consideration: Careful analysis is required to separate eligible from ineligible assets. For instance, accounts receivable must be handled outside the rollover and taxed accordingly, often requiring additional planning to minimize the impact on cash flow.

 

3. Structuring the Consideration

When assets are transferred to a corporation under Section 85, the business owner receives shares in exchange. These shares represent the owner’s equity in the new corporate entity and ensure continuity of ownership.

Classes of Shares:
The type and structure of shares issued can vary based on the business’s strategic goals. Common options include:

• Common Shares: Provide voting rights and entitlement to future growth.
• Preferred Shares: Offer fixed dividends and are often used for estate planning or tax optimization.

Strategic Structuring: Share issuance can be tailored to achieve specific objectives, such as:

• Locking in the current value of the business for the owner while issuing growth shares to family members for succession planning.
• Creating a balanced equity structure to attract future investors.

Example: A sole proprietor transferring $500,000 in assets might receive 5,000 common shares valued at $100 each. This issuance ensures the owner retains equity control while setting the stage for future growth.

Key Consideration: Proper share structuring requires alignment with long-term business goals, tax efficiency, and compliance with CRA requirements.

 

4. Filing the Joint Election

To formalize the Section 85 rollover, the business owner and the newly incorporated entity must file a joint election using Form T2057, known as the Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation.

Critical Information on Form T2057:

• Agreed-Upon Value: The value assigned to the transferred assets. This amount must fall between the asset’s adjusted cost base (ACB) or undepreciated capital cost (UCC) and its FMV. The agreed amount ensures deferral of capital gains and recaptured depreciation.
• Consideration Details: Specifies the type, class, and value of shares issued in exchange for the transferred assets.

Filing Deadline: The election must be filed by the earliest tax return deadline of the transferor or the corporation for the tax year in which the transfer occurs. Missing this deadline can result in the loss of the rollover’s tax deferral benefits and may trigger immediate tax liabilities.

Documentation Requirements:

• Asset valuations and appraisals to support FMV claims.
• Detailed records of the agreed amounts for each transferred asset.
• Supporting documentation for share issuance.

Key Consideration: Filing errors, such as incorrect valuations or late submissions, can invalidate the election and result in unintended tax consequences. Engaging a tax professional ensures accuracy and compliance throughout the process.

 

Additional Considerations in the Rollover Process

1. Negotiating the Agreed Amount: Choosing the agreed amount requires strategic planning. Setting this value too low may reduce future deductions, while setting it too high could trigger unnecessary taxes. Balancing these factors is essential for tax efficiency.
   2. Planning for Future Tax Events: While Section 85 defers taxes, these liabilities will eventually arise when the assets or shares are sold. Planning for this eventuality ensures there are no surprises down the road.
   3. Aligning with Business Goals: The rollover process should align with broader business objectives, such as succession planning, attracting investors, or preserving family wealth.

 

Conclusion

The Section 85 rollover process is a powerful tool for transferring assets from a sole proprietorship to a corporation without triggering immediate tax liabilities. By following the key steps—valuing assets accurately, identifying eligible property, structuring share consideration strategically, and filing the joint election correctly—business owners can achieve a seamless and tax-efficient transition.

At Shajani CPA, we specialize in guiding family-owned enterprises through this process, ensuring compliance with CRA guidelines while optimizing tax benefits. Contact us today to learn how we can help you navigate the complexities of the Section 85 rollover and set your corporation on the path to long-term success.

 

Benefits of Incorporating with a Section 85 Rollover

Incorporating a sole proprietorship using a Section 85 rollover offers a range of strategic benefits, allowing business owners to optimize their tax position, preserve wealth, and plan for future growth. This process is more than just a technical tax strategy—it is a powerful tool for aligning business structure with long-term goals. Below, we explore the key advantages of incorporating through a Section 85 rollover in depth.

1. Tax Deferral

One of the most significant benefits of using a Section 85 rollover is the ability to defer taxes on the transfer of assets. When business assets are transferred to a corporation at their adjusted cost base (ACB) or undepreciated capital cost (UCC), the immediate tax liabilities typically triggered by a deemed disposition are deferred.

How Tax Deferral Works:
The CRA generally views the transfer of assets from a sole proprietorship to a corporation as a sale at fair market value (FMV), which could result in:

• Capital gains tax on appreciated assets.
• Recapture of depreciation on depreciable property.

With a Section 85 election, the agreed amount—set between the ACB or UCC and the FMV—becomes the transfer value. By setting this value closer to the asset’s cost base, the transferor can defer any tax consequences until a future event, such as the sale of the corporation’s assets or shares.

Example:
A sole proprietor transfers machinery with an FMV of $100,000 and a UCC of $50,000. Without a Section 85 election, the $50,000 difference would be recaptured and taxed immediately. With the rollover, the agreed amount is set at $50,000, deferring the tax liability until the corporation disposes of the asset.

Benefits of Tax Deferral:

• Conserve Cash Flow: By deferring taxes, business owners can redirect funds that would otherwise be used for tax payments into reinvestments, operations, or growth opportunities.
• Enhanced Financial Flexibility: The deferred liability allows businesses to maintain liquidity, providing a stronger foundation for future strategic initiatives.

 

2. Access to Lower Corporate Tax Rates

Incorporation offers access to significantly lower tax rates on active business income compared to the personal tax rates applied to sole proprietors. This advantage becomes especially pronounced as business income grows, enabling corporations to retain more profits for reinvestment and expansion.

Small Business Deduction (SBD):
For active business income under $500,000, Canadian-controlled private corporations (CCPCs) benefit from reduced corporate tax rates. Depending on the province, this rate can be as low as 9-15%, compared to personal income tax rates, which often exceed 40% for high earners.

Example of Tax Efficiency:
A sole proprietorship earning $300,000 annually is taxed at personal income tax rates, potentially resulting in a tax liability of $120,000. If incorporated, the same income could be taxed at 12%, resulting in a corporate tax liability of $36,000—saving $84,000 annually.

Additional Opportunities for Tax Optimization:

• Retained Earnings: Unlike sole proprietorships, corporations can retain profits within the business for reinvestment, deferring personal tax liabilities until dividends are paid.
• Income Splitting: By issuing shares to family members, corporations can distribute dividends across multiple individuals, potentially reducing the overall tax burden by utilizing lower marginal tax rates.

Fueling Growth:
The reduced tax liability leaves more funds available for expansion, hiring, or investing in new technologies, positioning the corporation for long-term success.

 

3. Facilitating Estate Planning

Incorporation with a Section 85 rollover simplifies estate planning and succession strategies, particularly for family-owned businesses. By structuring ownership through shares, business owners can lock in the current value of the business while transferring future growth to the next generation in a tax-efficient manner.

Using Growth Shares for Wealth Transfer:
Incorporating allows for the issuance of growth shares to family members, enabling the owner to retain control while shifting future appreciation to heirs. This structure reduces the taxable value of the owner’s estate while ensuring that the next generation benefits from the business’s success.

Example:
A family business valued at $2 million is incorporated using a Section 85 rollover. The parents retain preferred shares reflecting the current value of the business, while growth shares are issued to their children. As the business grows to $3 million, the $1 million in additional value accrues to the children, bypassing the parents’ estate and minimizing future estate taxes.

Simplified Ownership Transfers:

• Continuity: Incorporation ensures that the business operates as a separate legal entity, allowing for seamless transitions of ownership without disrupting operations.
• Tax Efficiency: Transfers of shares can often be structured to minimize or defer taxes, particularly when utilizing tools like the Lifetime Capital Gains Exemption (LCGE) for Qualified Small Business Corporation (QSBC) shares.

 

Why These Benefits Matter for Family-Owned Enterprises

For family-owned businesses, incorporating with a Section 85 rollover is not just about tax savings—it is about creating a robust framework for long-term sustainability and growth. Key reasons why these benefits are especially relevant include:

• Preserving Wealth Across Generations: Incorporation provides tools to reduce estate taxes, ensuring that more of the family’s wealth is retained.
• Supporting Strategic Growth: The tax savings and financial flexibility gained through incorporation fuel the resources needed for expansion, innovation, or diversification.
• Ensuring Stability: The legal protections and continuity offered by incorporation safeguard the business from personal financial risks and disruptions.

 

Conclusion

Incorporating a sole proprietorship using a Section 85 rollover offers a range of advantages, from deferring taxes and accessing lower corporate tax rates to facilitating estate planning and intergenerational wealth transfer. These benefits provide a solid foundation for family-owned enterprises to grow, thrive, and secure their legacy.

At Shajani CPA, we specialize in guiding businesses through the incorporation process, ensuring that every decision aligns with your financial goals and ambitions. Contact us today to learn how a Section 85 rollover can unlock new opportunities for your business while preserving wealth for future generations.

 

Real-Life Case Studies: How Shajani CPA Helped Clients Achieve Significant Tax Savings

Incorporating a business with a Section 85 rollover is more than a tax strategy—it’s a powerful tool for achieving long-term financial goals. At Shajani CPA, we specialize in guiding family-owned businesses through the complexities of incorporation, tailoring strategies to meet each client’s unique needs. The following case studies showcase how we’ve helped clients save on taxes, preserve wealth, and secure their business legacies.

 

Case Study 1: Transitioning a Landscaping Business for Growth and Stability

Client Background: A client operating a thriving landscaping business sought to incorporate to access lower tax rates, protect personal assets, and position the business for future growth. The business owned valuable equipment and goodwill with a combined fair market value (FMV) of $500,000.

Challenges: The owner faced potential tax liabilities from the transfer of these assets, including $200,000 in unrealized gains, which could result in a substantial immediate tax burden. The goal was to incorporate without disrupting cash flow or operations.

Strategy: Shajani CPA facilitated a Section 85 rollover, transferring eligible assets, including equipment and goodwill, to the corporation. By setting the agreed amount at the adjusted cost base (ACB) of $300,000, the transaction deferred $200,000 in taxable gains. In exchange, the client received shares in the corporation valued at $500,000.

Outcome:

• Immediate Tax Savings: The deferral of $200,000 in gains saved the client approximately $60,000 in taxes, assuming a marginal tax rate of 30%.
• Enhanced Credibility: Incorporation improved the business’s credibility with corporate clients and lenders, opening doors to larger contracts and favorable financing terms.
• Increased Financial Flexibility: By preserving cash flow, the client was able to reinvest in new equipment and expand service offerings, accelerating business growth.

Shajani CPA’s expert handling of the Section 85 rollover not only minimized the client’s tax burden but also provided the foundation for long-term growth and stability.

 

Case Study 2: Incorporating a Family-Owned Retail Store for Succession Planning

Client Background: A family-owned retail store with a strong local presence wanted to incorporate to facilitate the smooth transfer of ownership to the next generation. The business had goodwill and inventory valued at $1.2 million.

Challenges: The owners needed to ensure the transition was tax-efficient while maintaining control during the process. Without proper planning, the transfer could trigger significant tax liabilities, reducing the value of the business and complicating succession planning.

Strategy: Shajani CPA structured a Section 85 rollover to transfer the business assets into a newly formed corporation. Preferred shares were issued to the parents, reflecting the current value of $1.2 million, while growth shares were issued to the children, allowing them to benefit from future appreciation in value. This strategy locked in the current value for the parents while transferring future growth to the next generation.

Outcome:

• Significant Tax Savings: By deferring gains of $1.2 million, the family preserved $400,000 in taxes, assuming a marginal tax rate of 33%.
• Seamless Succession: The issuance of growth shares ensured a tax-efficient transfer of wealth while keeping the business under family control.
• Business Continuity: Incorporation enabled the store to continue operations uninterrupted, maintaining customer confidence and employee stability.

Through Shajani CPA’s meticulous planning and execution, the family achieved their succession goals while minimizing tax liabilities and preserving the value of their legacy business.

 

Conclusion

These case studies highlight how Shajani CPA’s expertise in Section 85 rollovers can help family-owned businesses achieve their strategic goals while saving on taxes. Whether facilitating growth or ensuring a seamless intergenerational transfer, our tailored solutions provide clients with the tools they need to succeed.

If you’re considering incorporation for your business, let Shajani CPA guide you through the process. Contact us today to learn how we can help you optimize your tax strategy and secure the future of your business.

 

Common Challenges in the Incorporation Process

Incorporating a business through a Section 85 rollover offers significant advantages, but the process is not without its challenges. Missteps in valuation, filing, or asset selection can lead to costly errors, including CRA reassessments, missed tax benefits, and unforeseen liabilities. At Shajani CPA, we help clients navigate these pitfalls, ensuring a seamless transition with maximum tax efficiency. Below, we explore the most common challenges and how we address them to safeguard our clients’ interests.

 

1. Valuation Disputes: Ensuring Accurate Asset Valuation

The Challenge: One of the most frequent issues during incorporation is inaccurate asset valuation. The Canada Revenue Agency (CRA) requires that fair market value (FMV) be properly assessed for all assets transferred under Section 85. Undervaluing or overvaluing assets can lead to:

• CRA reassessments, resulting in additional taxes, interest, and penalties.
• Disputes over the agreed amount, which may compromise the tax deferral benefits.

How Shajani CPA Helps: We employ professional appraisers and valuation experts to ensure every asset’s FMV is accurately determined and well-documented. This includes tangible assets like equipment and real estate, as well as intangible assets such as goodwill and intellectual property. Our meticulous approach provides the necessary support to defend valuations in the event of a CRA inquiry.

Client Success Story:
A family-owned manufacturing business sought to incorporate, but their self-assessed goodwill valuation raised red flags with the CRA. Shajani CPA engaged a professional appraiser to provide a detailed goodwill valuation supported by market data. This approach not only avoided a potential CRA reassessment but also preserved $75,000 in potential penalties and additional taxes.

 

2. Filing Deadlines: Avoiding Missed Elections

The Challenge: Filing Form T2057, the joint election required for a Section 85 rollover, must be completed and submitted by the earliest tax return deadline of the parties involved. Missing this deadline results in the disqualification of the tax deferral provisions, triggering immediate tax liabilities on the deemed disposition of assets.

How Shajani CPA Helps: Our team takes a proactive approach to ensure compliance with all filing requirements. We:

• Track deadlines meticulously to ensure Form T2057 is submitted on time.
• Prepare comprehensive documentation to minimize processing delays.
• Liaise with the CRA to address any procedural issues that arise.

Client Success Story:
A retail store owner planning to incorporate overlooked the T2057 filing deadline while preparing their personal tax return. Shajani CPA identified the oversight during a consultation, promptly prepared the election form, and negotiated a late filing acceptance with the CRA. This saved the client over $200,000 in immediate tax liabilities and preserved the rollover benefits.

 

3. Excluded Assets: Identifying Ineligible Property

The Challenge: Not all assets qualify for a Section 85 rollover. Business owners often overlook ineligible property, such as:

• Cash.
• Accounts receivable.
• Personal-use property.

Failing to exclude these assets can result in unexpected tax liabilities, as ineligible assets are subject to immediate taxation upon transfer.

How Shajani CPA Helps: We conduct a thorough review of all business assets to identify those eligible for rollover and those requiring alternative planning. For ineligible assets, we develop strategies to minimize tax exposure, such as managing accounts receivable separately or handling personal-use property outside the incorporation process.

Client Success Story:
A technology consultant incorporating their sole proprietorship included accounts receivable valued at $150,000 in the asset transfer. Shajani CPA identified this as an ineligible asset and advised separating it from the rollover. By implementing an alternative strategy to manage the receivables, we saved the client $45,000 in taxes.

 

How Shajani CPA Mitigates Risks

Shajani CPA’s proactive approach addresses these challenges with:

• Expert Valuation Services: Ensuring FMV accuracy and compliance with CRA guidelines.
• Deadline Management: Monitoring critical dates and preparing all required forms on time.
• Customized Strategies: Tailoring the incorporation process to account for ineligible assets and unique business circumstances.

 

Conclusion

Incorporating a business through a Section 85 rollover is a complex process with potential pitfalls. From valuation disputes to missed filing deadlines and ineligible assets, each challenge requires careful attention to avoid costly consequences. Shajani CPA’s expertise ensures a smooth transition, safeguarding clients from these risks while maximizing the benefits of incorporation.

If you’re planning to incorporate, contact Shajani CPA today to ensure your transition is seamless, compliant, and aligned with your business goals. Let us handle the complexities so you can focus on growing your business.

 

Conclusion: Your Trusted Partner in Incorporation

Transitioning from a sole proprietorship to a corporation is more than a structural change—it’s a strategic step toward securing your business’s long-term success. Incorporation under a Section 85 rollover provides invaluable benefits, including tax deferral, access to lower corporate tax rates, and the ability to facilitate estate and succession planning. However, navigating the complexities of this process requires meticulous planning and expert guidance.

At Shajani CPA, we specialize in simplifying the incorporation journey for family-owned enterprises. With decades of experience and expertise in tax law, corporate accounting, and financial strategy, we provide tailored solutions that align with your unique business ambitions. Our comprehensive approach ensures that every step of the incorporation process—asset valuation, eligibility assessment, election filing, and long-term planning—is executed seamlessly and with maximum tax efficiency.

When you choose Shajani CPA as your trusted partner, you gain access to:

• Unmatched Expertise: Our team combines deep knowledge of the Income Tax Act with practical experience in handling complex Section 85 rollovers.
• Strategic Insights: We align your incorporation strategy with your broader business and personal goals, ensuring every decision contributes to your long-term success.
• Proven Results: Through personalized guidance, we’ve helped countless clients save significant taxes, preserve wealth, and position their businesses for sustainable growth.

Client Success Stories:
From helping a landscaping business save $60,000 in deferred taxes to facilitating a family-owned retail store’s intergenerational transfer with $400,000 in tax savings, our track record speaks to our commitment to excellence.

Incorporation is more than a financial decision; it’s a turning point in your business journey. Let Shajani CPA guide you through this pivotal transition, helping you unlock the full potential of incorporation while protecting your assets and planning for the future.

Take the Next Step
Contact us today to learn how we can support your transition from a sole proprietorship to a corporation. With Shajani CPA by your side, you can confidently navigate the complexities of tax planning, secure the financial future of your business, and realize your ambitions with clarity and precision.

 

 

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2025 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.

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