The Tax & Bookkeeping Side of Major Business Events
- Targeted Accounting
- Business
Stay Ahead With Expert Bookkeeping Insights!
Table of Contents
Why These Moments Matter
Routine compliance is forgiving. Miss a filing and you pay a penalty. Transitions are not forgiving, because the tax consequence is usually locked in by an action already taken.
An owner who incorporates in March and asks in November whether it was done correctly may find that the answer is no and the fix is expensive. An owner who accepts an offer structured as an asset sale and then asks about the lifetime capital gains exemption has already given it away. In each case the advice was worth a multiple of its cost, and only if it came first.
Key Takeaways
- Every one of these events has a tax decision embedded in it, and in most cases the decision must be made before the event, not reported after.
- Incorporating a profitable sole proprietorship without a section 85 rollover can trigger tax on assets you never sold.
- Buyers want assets; sellers want shares. The gap is worth hundreds of thousands on a mid-sized sale.
- Closing a business badly leaves open CRA accounts that generate assessments for years afterward.
- The cheapest advice you will ever buy is the conversation before one of these events.
Starting a Business
The first decision is structure. A sole proprietorship costs nothing to start, allows business losses to offset your other income — genuinely valuable in early years — and carries unlimited personal liability. A corporation separates liability, offers the small business rate on retained profit, and costs more to run. A partnership is a sole proprietorship with the added need for a written agreement, which partnerships without one invariably wish they had. Our comparison of sole proprietorship vs corporation vs partnership goes deeper on each.
Most businesses should start unincorporated unless liability is a real and immediate concern, or profitability is expected to exceed personal needs from the outset. Early losses are worth more in your hands than trapped in a corporation.
The setup checklist is short and worth doing properly:
- Register the business name provincially, or incorporate, as applicable.
- Obtain a business number, and add program accounts as needed — RT for GST/HST, RP for payroll, RC for corporate income tax.
- Open a separate business bank account from day one. This single step saves more in bookkeeping cost than anything else on the list.
- Decide on GST/HST registration. Below $30,000 you may register voluntarily, and should if your customers are businesses or you have significant start-up purchases.
- Set up accounting software before the first transaction, not after fifty.
- Register for workers’ compensation if your province requires it — some industries require it before you have any employees.
- Track start-up costs incurred before opening. Many are deductible or eligible for capital treatment, and they’re routinely lost because nobody kept the receipts.
Hiring Your First Employee
Covered fully in the Canadian small business payroll handbook, but the sequencing matters here. Open the payroll account before the first pay date. Confirm the employee’s province of employment, because that governs their tax rates, TD1 forms, employment standards and workers’ compensation. Have TD1s completed on or before day one. Register for workers’ compensation. And budget the true cost — roughly 12 to 18% above gross salary before benefits.
Decide the employee-versus-contractor question honestly at this point rather than defaulting to a contract because it’s simpler. The classification is determined by the substance of the relationship, and reclassification is assessed against the employer for both halves of CPP and EI plus penalties, across every open year.
Moving From Sole Prop to Corporation
This is the transition most often done badly, because it looks administrative and is not.
Transferring your business assets into the new corporation is a disposition at fair market value. If those assets have appreciated — goodwill, equipment worth more than its remaining tax value, inventory — you have a taxable gain on a transaction in which no money changed hands.
A section 85 rollover lets you elect to transfer assets at an agreed amount, generally deferring that gain. It requires a properly prepared election filed on time, consideration that includes shares of the corporation, and valuation support for what is being transferred. It is not a form you complete casually, and a late-filed election carries penalties.
Timing is the other half. Incorporating mid-year means two sets of books, two returns, and an allocation of income between the proprietorship and the corporation for the year. Incorporating at a natural break — ideally aligned to a year end — avoids most of that. What the corporation then owes, and when, is in our T2 corporate tax guide.
Then close the loop on the old structure: transfer or re-register GST/HST and payroll accounts, notify clients and update contracts so payments are made to the corporation, move bank accounts and merchant processing, update insurance and licences. Revenue paid to you personally after incorporation, because a client never updated their records, creates an allocation problem that has to be unwound.
Selling the Business
The structural question dominates everything else (the CRA’s own checklist for selling a business covers the account changes that follow).
| Share sale | Asset sale | |
|---|---|---|
| Seller’s tax | Capital gain, potentially sheltered by the LCGE | Recapture and gains inside the corporation, then extraction to you |
| Buyer’s position | Inherits history and liabilities; no cost-base step-up | Steps up cost base; leaves unknown liabilities behind |
| Usually preferred by | Seller | Buyer |
The lifetime capital gains exemption — $1,275,000 for 2026 — is available on qualifying small business corporation shares and is the single largest reason sellers push for a share sale. Qualifying requires the 90% active-asset test at sale, the 50% test throughout the preceding 24 months, and the holding-period condition. A corporation carrying surplus cash or investments can fail the 90% test on the day of sale.
That is why purification has to happen early. Moving excess cash and non-operating assets out of the corporation is itself a taxable event that needs planning, and it cannot be done the week before closing.
Three years out is the right horizon. Purify the balance sheet. Get financial statements into a condition a buyer’s advisers will accept without discounting. Document that the business runs without you, since owner dependence is the most common reason a price is reduced. Clear shareholder loan balances. And review the share structure, because family ownership arranged well in advance can multiply the exemption across more than one person — arranged late, it achieves nothing.
Closing Down
Closing is the event owners treat most casually and where the loose ends last longest.
A business that simply stops trading, without closing its CRA accounts, remains obliged to file. Unfiled nil returns accumulate penalties, and the CRA can issue arbitrary assessments based on estimates — which then have to be disputed rather than ignored, sometimes years later.
The sequence for an orderly closure:
- File all outstanding returns to the date of cessation.
- Issue final T4s and ROEs for every employee.
- File a final GST/HST return. On deregistration you are generally deemed to have sold remaining business assets at fair market value and must account for tax on them — a step that surprises people holding equipment or inventory.
- Close each program account with the CRA explicitly.
- For a corporation, file a final T2 for the period ending on wind-up, and complete the dissolution with the incorporating jurisdiction — Corporations Canada federally, or the Ontario Business Registry for Ontario corporations. A corporation that is not formally dissolved continues to exist and continues to owe annual returns.
- Distribute remaining assets deliberately. Property distributed to shareholders is treated as disposed of at fair market value, and the capital dividend account may allow part of the distribution to come out tax-free — but only if someone checks the balance before it’s too late.
- Retain all records for six years from the end of the last tax year. The obligation survives the business.
If the business is closing because it failed rather than because it finished, there may still be value available — losses that can be carried back against tax paid in the three preceding years, and an allowable business investment loss on shares or debt of a small business corporation that can be applied against ordinary income rather than only capital gains. Both are commonly missed by owners who simply want the whole thing over with.
One of These Coming Up?
The conversation before the event costs a fraction of the cleanup after it. We’ll tell you what’s reversible and what isn’t.
