sole proprietorship to a corporation, "Section 85 assets rollover"

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Mar 3rd, 2021 2:49 pm

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Feb 28th, 2021 4:21 pm

waiting84 [OP]: Newbie; Feb 28, 2013; 37 posts; 2 upvotes; London

Feb 28th, 2021 4:21 pm

sole proprietorship to a corporation, "Section 85 assets rollover"

Hello All,

For the past couple of years I have been working as a software developer contractor and have sole proprietorship business registered with CRA. All my income is taken as personal income and I pay taxes. I am thinking of incorporating my business to get corporate tax benefits.

From what I read, I need to create a new incorporation and open new business/hst number with CRA. After everything is done I close my accounts in sole proprietorship.

However I am not clear about "Section 85 assets rollover", especially how it affects my situation. I only work for one client and I only use my computer. So I am not sure how to valuate my "goodwill" which will be transferred from sole proprietorship to incorporation.
Has any software developer contractors done this before.

Any help would be greatly appreciated.

Thanks.

9 replies

Feb 28th, 2021 9:07 pm

jkwan18: Sr. Member; Feb 23, 2005; 940 posts; 62 upvotes

Feb 28th, 2021 9:07 pm

waiting84 wrote: ↑ Hello All,

For the past couple of years I have been working as a software developer contractor and have sole proprietorship business registered with CRA. All my income is taken as personal income and I pay taxes. I am thinking of incorporating my business to get corporate tax benefits.

From what I read, I need to create a new incorporation and open new business/hst number with CRA. After everything is done I close my accounts in sole proprietorship.

However I am not clear about "Section 85 assets rollover", especially how it affects my situation. I only work for one client and I only use my computer. So I am not sure how to valuate my "goodwill" which will be transferred from sole proprietorship to incorporation.
Has any software developer contractors done this before.

Any help would be greatly appreciated.

Thanks.

If you only work for one client, your concern should be whether or not the corporation will be considered as a Personal Services Business:

https://www.taxtips.ca/glossary/persona ... siness.htm

If it is a PSB, you would not get the small business deduction, which means you won't be enjoying the low corporate tax rate.

+1

Feb 28th, 2021 9:25 pm

DaveTheDude: Deal Addict; Mar 3, 2018; 2799 posts; 3076 upvotes; GTA

Feb 28th, 2021 9:25 pm

With one client not sure goodwill will have any value as it sounds more like an employer / employee relationship. Whether you are deemed a PSB (likely), it won't matter much unless you are earning a significant amount where you have material cash left over. The point of incorporation is to defer tax on amounts left in the corporation. With corporate tax and the personal tax on dividends to you when you withdraw funds the overall tax will be similar to what you pay now.

Mar 1st, 2021 8:43 am

waiting84 [OP]: Newbie; Feb 28, 2013; 37 posts; 2 upvotes; London

Mar 1st, 2021 8:43 am

Thanks for the explanation. However I have few other projects coming up from in next several months and that's why I'm thinking of incorporating.

Mar 1st, 2021 8:47 am

waiting84 [OP]: Newbie; Feb 28, 2013; 37 posts; 2 upvotes; London

Mar 1st, 2021 8:47 am

Thanks for the explanation. I'm planning not to take out all available income as dividends. Keeping some as a cashe reserve for a rainy day.

Do you think there is no goodwill value in my situation?

Also does CRA determine weather I'm a PSB or a small business? Or do I get certified from somewhere else.?

Mar 1st, 2021 9:58 am

jkwan18: Sr. Member; Feb 23, 2005; 940 posts; 62 upvotes

Mar 1st, 2021 9:58 am

waiting84 wrote: ↑ Thanks for the explanation. I'm planning not to take out all available income as dividends. Keeping some as a cashe reserve for a rainy day.

Do you think there is no goodwill value in my situation?

Also does CRA determine weather I'm a PSB or a small business? Or do I get certified from somewhere else.?

It seems to me that you're more like an employee (based on the limited info you provided), therefore, there may not be any goodwill.

PSB or not is determined by CRA, and is case-by-case depending on all relevant facts.

Feel free to PM me if you have questions in this regard, I have worked with a lot of IT contractors.

Mar 1st, 2021 10:05 am

waiting84 [OP]: Newbie; Feb 28, 2013; 37 posts; 2 upvotes; London

Mar 1st, 2021 10:05 am

Thanks I will pm you

Mar 1st, 2021 1:53 pm

crossborderguy: Member; Jan 18, 2017; 361 posts; 274 upvotes

Mar 1st, 2021 1:53 pm

Ugh, here we go again with the PSB stuff. First off, you're NOT necessarily a PSB. Here's a copy/paste of my frequently-repeated answer for this question on RFD:

The "key" with PSB's is that the review process always plays out as follows:

-- What was the intention of the parties;
-- Does the objective reality of the situation meet the subjective intention of the parties;

Ref. 1392644 Ontario Inc court case re. the "Two-step test."

In non-tax speak, make sure your contract has provisions for:

-- Using your own equipment (You did buy some equipment, right?);
-- Ability to contract out the work if you want (you don't have to though);
-- Ability to work on other jobs (ie. no exclusivity);

If you really want to cover your butt, review the RC 4110 paper, cherry-pick all of the stuff that CRA feels describe a contractor, and put that in your contracting agreement.

Having one client doesn't automatically make you a PSB - there's more to it.

Second, there probably isn't any goodwill, and as far as fixed assets to roll, you likely have some computer equipment worth all of $50. Do you have an awesome personal brand? Maybe some cool patents etc? If not, then it likely doesn't matter - Goodwill will likely be immaterial.

______
Canadian & US tax guy (CPA)

+2

Mar 1st, 2021 7:04 pm

waiting84 [OP]: Newbie; Feb 28, 2013; 37 posts; 2 upvotes; London

Mar 1st, 2021 7:04 pm

Thank you for the explanation.

Yes I use my own equipment. And I will have another clients in coming months.

I will take a look at that paper you mentioned and make sure I cover my bases when new contracts are signed.

Thanks

Mar 3rd, 2021 2:49 pm

hybridfx2: Member; Jan 19, 2009; 255 posts; 156 upvotes

Mar 3rd, 2021 2:49 pm

I did this for my business last year. I used an accountant and lawyer. Lawyer drafts the articles of purchase and sale of the business. Accountant does the tax filing with the CRA.

+2

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