Incorporation by an Individual in Business or a Partnership

If an individual in business or a partnership decides to incorporate, the property of the business is transferred to the new corporation. This has a significant tax impact because the individual or partnership is, in effect, selling the property to the new corporation. However, elections can be made to reduce the tax impact of incorporation.

Consumption taxes

By incorporating, an individual in business or a partnership sells all or part of the business to the new corporation.

In such a case, the vendor and the purchaser can jointly elect not to have GST and QST apply to the transaction. To make this election, you must complete form FP-2044-V, Election Respecting the Acquisition of a Business or Part of a Business.

For more information, click Sale of a Business.

Source deductions and employer contributions

An individual in business or a partnership that decides to incorporate is considered to have sold all or part of the business to the new corporation and to have transferred the employees to the new corporation. In this case, an employer succeeds another employer.

Income tax

If an individual in business or a corporation decides to incorporate and to transfer the property of the business to the new corporation, the transaction must take into account the fair market value (FMV) of the property.

To prevent the transfer from having immediate tax consequences (capital gain, recapture of capital allowance, business or property income), the individual or the partnership can use the rollover rule. To do so, the individual or partnership must:

  • dispose of qualified property to a taxable Canadian corporation
  • receive consideration including a share of the capital stock of the corporation
  • file, with the Canada Revenue Agency, a joint election with the corporation regarding the disposition of property by an individual or partnership to a taxable Canadian corporation

If the individual or partnership has made such a transfer, either form TP-518-V, Transfer of Property by a Taxpayer to a Taxable Canadian Corporation, or form TP-529-V, Transfer of Property by a Partnership to a Taxable Canadian Corporation, must be filed.

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