Before You Incorporate in Ontario: 7 Tax and Accounting Decisions to Get Right

An Online Portal Can File the Corporation. It Cannot Understand Your Business

Online incorporation services have a legitimate role. They can make the filing process faster and less expensive.

The limitation is that an automated system generally works with the information you provide. It cannot sit down with you and ask why you are incorporating, who may eventually own the business, whether you plan to retain profits, whether a spouse or business partner may become involved, or whether the structure needs flexibility for future tax planning.

The mechanics of incorporation are not necessarily complicated. The more important work is deciding what should go into the corporation and what should happen immediately afterward.

Mature businesses and experienced entrepreneurs commonly involve accountants, lawyers and other advisers in important structural decisions. The value of professional advice is not simply completing a form. It is helping ensure that the structure reflects the owner's objectives and does not overlook issues that may become expensive or inconvenient to correct later.

1. Decide Who Should Own the Corporation

For a simple owner-operated business, this may appear obvious. But the ownership decision can have longer-term consequences.

Changing ownership later can sometimes have tax and legal consequences. Starting with an appropriate structure may provide considerably more flexibility.

2. Think About the Share Structure Before Issuing Shares

A corporation does not simply have "shares." Its articles establish the classes of shares the corporation is authorized to issue and the rights attached to those classes.

A very basic share structure may be perfectly appropriate for a straightforward business. But business owners should not automatically assume that the simplest template is appropriate for every situation.

Different share classes can become relevant when dealing with future investors, multiple owners, voting control, dividend rights, succession planning, reorganizations or future estate freezes.

You do not need an unnecessarily complicated structure. You do, however, want to avoid discovering several years later that a little planning at incorporation could have provided useful flexibility.

3. Decide How You Will Put Money Into the Corporation

A new business often needs startup capital. The owner may put $10,000, $50,000 or considerably more into the corporation to fund equipment, inventory, rent, professional fees and other startup expenses.

How that money is recorded matters. Some amounts may represent share capital, while other amounts may properly be advanced as a shareholder loan. Properly documenting the initial funding makes the accounting cleaner and can affect how money may later be returned to the shareholder.

This is a simple example of something an incorporation portal cannot determine merely from an incorporation application.

4. Consider Your Corporate Year-End

Unlike most individuals, a corporation does not automatically have to use December 31 as its year-end.

A new corporation can generally choose its first fiscal year-end, provided the first tax year does not exceed 53 weeks. CRA requires a corporation to file its T2 return within six months after the end of its tax year.

Seasonality, bookkeeping cycles, owner compensation, related corporations and administrative convenience can all be relevant. Choosing a year-end should therefore be part of the startup discussion rather than an afterthought when the first tax return becomes due.

5. Determine Whether You Should Register for HST Immediately

Many new businesses assume they should simply wait until they reach $30,000 of revenue.

For most businesses, mandatory GST/HST registration generally becomes relevant when taxable supplies exceed the $30,000 small-supplier threshold, with the timing depending on how the threshold is exceeded. Registration can also be voluntary before that point for businesses making taxable supplies.

For a startup spending heavily on equipment, leasehold improvements, professional fees or other taxable business expenses, voluntary registration may sometimes deserve consideration because a registrant may be able to claim eligible input tax credits. For other businesses, immediate registration may add unnecessary administration.

Medical and healthcare businesses require particular care because many healthcare supplies are exempt from GST/HST, while other activities may be taxable. This is an area where the nature of your actual business matters far more than simply checking a box during incorporation.

6. Plan How You Will Pay Yourself

Once you operate through a corporation, the corporation's money and your personal money are no longer the same thing.

Owners often take funds through salary, dividends, repayment of legitimate shareholder loans or reimbursement of eligible business expenses.

Salary versus dividends can affect CPP, RRSP room, corporate deductions and personal taxation. There is rarely a universal answer that applies to every new corporation.

The important point is to establish the process early rather than repeatedly transferring money from the corporate bank account and asking the accountant at year-end how it should be recorded.

7. Set Up the Accounting System From Day One

One of the most common startup mistakes is treating bookkeeping as something to address once the business becomes larger.

By then, the owner may have mixed personal and business transactions, missed HST, paid expenses personally without recording them, or accumulated a year of poorly organized information.

Starting properly is much easier. At a minimum, a new corporation should consider:

A clean accounting system gives the owner better information about the business and makes tax compliance substantially easier.

Incorporation Is a Starting Point, Not the End of the Process

There is nothing inherently wrong with using technology to make incorporation faster or less expensive.

The problem arises when business owners assume that because incorporating is easy, deciding how the corporation should be structured is equally simple.

A portal can ask you what you want to enter. An experienced accountant can help you determine what questions you should be asking in the first place.

For a business owner expecting to build a meaningful company, the relatively small amount of planning performed at the beginning can be far more valuable than discovering several years later that something should have been structured differently.