---

As you get ready to incorporate your company, there are some important questions that you should address.

First, if you will be operating your business in Ontario, you can either incorporate an Ontario corporation or you can register a federal corporation and obtain an Ontario extra-provincial registration. Click here to read about the difference between Ontario and Federal corporations.

Next, you will have to decide whether you would like to incorporate by yourself (through either the Ontario Business Registry for Ontario corporations, or Corporations Canada for federal corporations), use an online service that offers incorporation kits (a.k.a. document filing services), or hire a law firm to handle your incorporation. This article will give you an overview of each and discuss the advantages and drawbacks of each.

HOW TO/STEPS TO INCORPORATE

As far as legal matters go, the process to incorporate yourself does not have to be too complex. However, incorporating a corporation is a legal procedure that requires you to understand the NUANS name search process, what’s included in the articles of incorporation, as well as the back-end paperwork that is required to organize your corporation. Below is summary of the general steps that are involved in incorporating a corporation.

• Conducting a NUANS (name) search. If you would like your new corporation to have a name (rather than a numbered name), you are required to obtain a NUANS search report before you begin the incorporation process to ensure that your business name is not already in use, or too similar to another company’s name. The NUANS is the statutory prescribed computerized name search report which lists business names, corporation names, and trademarks that have already been registered and that may be similar to your proposed name. The NUANS system isn’t available to the public, so if you are incorporating an Ontario company,  you will need to pay a third-party provider to conduct your NUANS search. Note that the NUANS system will simply provide you with a list of similar or identical names. The government system will not assist you with legal advice to ensure that your name is compliant with the applicable law and analyzing the NUANS search for your benefit – it will not stop you from registering the name when you incorporate. If your company name is too similar to another business’s name, this can have implications in the future, as you may find yourself being challenged or being sued by another corporation.  If you are incorporating a federal company, the good news is that the process through which you incorporate your company through Corporations Canada will include a NUANS search. Because your application will be assessed by someone from Corporations Canada who will ultimately accept or reject your application, it is less likely that you will run into problems with litigation over your business name in the future.

• Preparing and filing Articles of Incorporation. You can obtain your Certificate and Articles of Incorporation through the government websites: Ontario Business Registry for Ontario corporations, or Corporations Canada for federal corporations. The website will take you through a series of questions and you will need to provide information about your corporation, such as corporation name, registered address, directors’ information, etc.

You can find out what’s included in the Articles of Incorporation by clicking here:  https://blog.ordowerlaw.com/blog/what-is-included-in-the-articles-of-incorporation.

You will receive your certificate and articles of incorporation through the email you provide to the ministry. If you are incorporating in Ontario, your Certificate and Articles of Incorporation will generally be filed instantaneously. If you are incorporating federally, it can take anywhere from a few hours to a few business days to receive your Certificate and Articles of Incorporation, as your application will be reviewed by an examiner, and then approved or denied. You will need to make a payment of $300 for Ontario companies and $200 for federal companies.

• Filing applicable Government Forms.  Once you have filed your Articles of Incorporation, you will also have to file certain forms with the Ontario Business Registry or Corporations Canada as applicable.
  • For an Ontario corporation, you will have to file a Form 1 – Initial Return with the Ontario Ministry within 60 days following your incorporation. This filing can be done through the Ontario Business Registry (see our guide to OBR here). The form will require the names and address for service for the directors and officers of the corporation. You will also have to indicate date of elections and dates of resignation, if applicable. registered address of the corporation.  Some of this information will be pre-populated for you. 
  • For federal corporations, if carrying on business In Ontario, you will have to complete a Form 2 – Extra Provincial Registration to obtain an Ontario extra provincial license. You will file a Form 2 as part of the incorporation application.

• Creating your Minute Book. A Minute Book is a physical binder or an electronic file that includes all of the organizational documents to effect the elections and appointments of directors and officers of the Corporation and the issuance of shares to the shareholders of the Corporation and keeps the corporate records that corporations are required to maintain. It documents the story of your corporation from the date of incorporation through to its winding up.

If you’re wondering whether or not you actually need a Minute Book, the answer is that you do. Both Ontario Business Corporations Act and the Canada Business Corporations Act require corporations to keep and maintain certain corporate records. These corporate records are kept in what we are now referring to as the Minute Book. Although some people choose to skip this step, we highly recommend that you do not skip this, as it is required by law, and especially if you are creating a corporation with more than one owner. By foregoing the Minute Book, you risk setting yourself up for conflict between yourself and your co-owner(s) if and when you sell your company. For example, if don’t have proper documentation to support who the shareholders are, you could have a dispute down the road over who owns what. Having a properly organized fully signed Minute Book will protect your rights with partners and avoid any he-said-she-said.

The organizational documents that are in your Minute Book will generally include a general and borrowing bylaw, the certificate and articles of incorporation, consents to act as directors, resolutions of the directors and shareholders, share certificates, registers and ledgers, the applicable government forms (i.e. Form 1/Form 2), NUANS report, share certificates and other corporate records required to be created and maintained under applicable law.

Incorporating by Yourself

Advantages of Incorporating by Yourself:

• Costs. Incorporating yourself directly through the Ontario Business Registry or Corporations Canada is the most cost-effective way to incorporate. If you have the time, resources, and experience to prepare the necessary documents, the cost to incorporate your corporation will simply be: (1) the government filing fee ($300 for Ontario corporations and $200 for federal corporations); and (2) the fee to obtain a NUANS report if you will be incorporating a named company.  The cost of getting pre-searches and a NUANS report will generally range from $13.00 to $100 depending on the service provider.

Drawbacks of Incorporating by Yourself:

• NUANS. If you are incorporating an Ontario corporation on your own, you will have to order a NUANS report from a third-party service provider or lawyer who has access to the government NUANS system prior to incorporating your company.

As mentioned above, the NUANS report will provide you with a list of names of registered business names, corporate names and/or trademarks that are similar to your proposed name.  The NUANS report does not guarantee that your name is compliant with the laws relating to corporate names set out in the Ontario Business Corporations Act and Canada Business Corporations Act. In addition, the NUANS search system is neither exhaustive nor conclusive. In either scenario, the NUANS report or the fact that your corporation was incorporated is not a defence if your corporate name is challenged at a future date because the name of your corporation is contrary to prescribed rules. You will be responsible for any losses suffered or resulting from confusion with existing corporate names, business names and trademarks.

If you are incorporating in Ontario, you will need to be to review the NUANS report before filing your Articles of Incorporation. You will not be prevented from incorporating in Ontario even if similar names appear on your NUANS report. If you are incorporating a federal company, your NUANS search will be assessed by an examiner at Corporations Canada who will send deficiency notices to you if your name is not compliant with the prescribed rules.

• Articles of Incorporation. It is true that there are many templates online for Articles of Incorporation. Corporations Canada provides you with optional language that can be used in your articles and offer templates for one classes of shares or two classes of shares. However, if you are not familiar with the provisions that should be included in the Articles of Incorporation, you may not only complete them incorrectly, you may not create the classes of shares you may ultimately want. If you don’t understand what these shares classes are and the different attributes they have, you may not be able to make the best choice for yourself when choosing a template.

As a quick summary, there are generally two broad categories of shares: Common shares (or participating shares) and Special or Preference Shares (or non-participating shares). Common shares will entitle the holder to participate in the growth of the company (i.e. a holder of common shares will be entitled to their proportionate share of the proceeds of sale of the business or to their proportionate share of the assets of the corporation upon its winding up). Special shares, on the other hand, do not entitle the holder to participate in the value of the company.  They simply entitle the directors of the corporation to pay a dividend to the shareholders of those shares. Special/Preference shares are generally used for income splitting and to effect certain tax reorganizations.

Regulated professionals should also be wary of filing on their own as governing bodies require the Articles of Incorporation of professional corporations to include specific restrictions on the business the corporation may carry on and restrictions related to the issuance and transfer of shares.

• Minute Book. The Minute Book is a relatively lengthier document and requires both time and knowledge to create. This is one of the main things that is missed when people incorporate on their own. Neither the Ontario Business Registry nor Corporations Canada provides a Minute book for your corporation. The documentation in the Minute Book provides direct evidence of who owns what. If you don’t have a Minute book in place, you leave yourself open to the possibility of disputes in the future about ownership or being unable to obtain signatures of the first directors of the corporation if they are no longer involved in the business years later. In the event that you want to sell your business, for example, the first thing a lawyer will request as part of their due diligence is your Minute book so that they can confirm who the directors/officers and shareholders of the Corporation are.  Ultimately, lawyers want to ensure that the people purporting to purchase or sell the business have the authority to do so.  The cost of obtaining a Minute years after incorporation may be significantly higher than if you did it from the outset.

• Lack of Legal Guidance/Advice. Another drawback is that you would not be able to take advantage of guidance or legal advice from an experienced professional. One implication of not utilizing professional expertise is that you may not end up issuing the number and types of shares that will be helpful for the growth of your business. The number and type of shares you issue will enable you to make decisions in the future regarding things such as adding your partner to your company, whether they will have decision-making power or not, etc.

Using an Online Document Filing Service

You may also opt to incorporate through a document filing service. There are many sites that offer this service. These websites can generate your Certificate and Articles of Incorporation, file an initial return, and generate a Minute Book with the organizational documents for you. Similar to the government website, these sites will ask you for information such as details like registered address, nature of your business, fiscal year-end, directors and officers, share classes, etc. Once you have entered this information, it will take you through a number of options where you can select which services you would like purchase at an additional cost (e.g. there may be, and usually is, an additional cost for filing an initial return, conducting a NUANS search, generating a Minute Book, etc.).

Advantages of Using an Online Document Filing Service:

• Costs. It may be more cost effective to use an online document filing service than most lawyers. There is also the advantage of the ease and convenience of going at your own pace, as well as the flexibility of submitting your information at any time of the day. Additionally, there may be a back-end administrative assistant that can assist you with your needs.

Drawbacks of Using an Online Document Filing Service:

• “Hidden” Costs. Although at first glance it may seem inexpensive to use this service, usually by the time you have clicked through all of the documents you require (such as a Minute Book), the price is significantly higher than what was initially advertised. If you opt for the bare-bones package of just generating your Certificate and Articles of Incorporation without paying any extra fees, you will essentially be paying an added service fee for something that you can do quite easily by yourself through the government website.

• NUANS. A document filing service may provide some basic analysis regarding your name, however, they are not lawyers, and are not regulated by the Law Society of Ontario. As such, they cannot provide legal advice.

• Articles of Incorporation. Similar to the government website, these DIY sites will ask you for information such as details like registered address, nature of your business, fiscal year-end, directors and officers, share classes, etc. These services cannot provide you with any legal advice if you are confused about what answers to provide or what share classes you require.  Document filing services may also offer templates and give you options for different classes of shares that you want your corporation to be authorized to issue. However, if you don’t understand what these shares classes are and the different attributes they have, you may not be able to make the best choice for yourself when choosing a template.

Note: Some Do-It-Yourself websites promote annual memberships for online access to your Minute Book. While convenient, this ongoing annuity may be unnecessary if there are no corporate changes to your company.  Based on our experience, it is very unlikely that you would need to amend your articles each year after you’ve incorporated.

Incorporating with a Lawyer

Advantages of Hiring a Lawyer:

• NUANS. If you incorporate with a lawyer, the lawyer will order and review the NUANS report with you and help ensure that your corporation manages risk related to its name.

• Articles of Incorporation. If you work with a lawyer, the lawyer will be able to draft your Articles of Incorporation to include any number of voting and non-voting common, special and preference shares to give you sufficient flexibility for the future to bring on partners, issues shares to family members, investors and/or employees. A big advantage of using a lawyer is the personalization of your documents. You may be the sole shareholder of your company right now, but you may want to reserve the right to issue shares to family members, friends, investors, etc. in the future – or you may want to make choices about who has decision-making/voting power in your company. For example, if you and your spouse will be equal partners on a corporation, you may want to create separate classes of common/participating shares in order to provide flexibility for sending out dividends. If you have children, you may want your articles to authorize the issuance of multiple classes of non-participating shares in order to be able to facilitate income splitting with, if available and recommended by an accountant. All these determinations should be reflected in the classes of shares that are available – which should be set up during the incorporation process.

• Minute Book. Hiring a lawyer will save you the time and hassle of creating your organizational documents. A lawyer who is familiar with the incorporation process will be able to provide you with legal advice and support. For example, based on the nature of your business needs, a lawyer may recommend setting up your business in ways which will optimize your corporate tax planning opportunities, including setting up a holding company as well as an operating company.

• Legal Advice. Overall, a lawyer will be able to provide advice on different corporate structures to enable you to optimize your corporate tax planning and creditor proofing structures, and save you time and money by explaining why this might not be the right option at this point in your business. You will also be able to build a relationship with a business lawyer who will be able to assist you with anything you need down the line in relation to your business.

Drawbacks of Hiring a Lawyer:

• Costs. Generally speaking, incorporating with a lawyer is the most expensive option, so this option may not be ideal for cost-sensitive individuals.  Most law firms charge between $1250 and $1500 or more to incorporate.

What we do at Ordower Law:

At Ordower Law, our philosophy is simple: we offer incorporation packages at the price of an online document filing service, but with the advantage of having the expertise of lawyers with years of experience under their belt. Simply put, we have the lawyers, technology, and back-end processes to generate all of your documents and incorporate your company with a quick turn-around time of 1-2 business days. We believe that our law firm offers the best of both worlds – you get the lawyer experience at the price of an online document filing service.

We offer all-inclusive packages. Our current pricing is: $799 for federal incorporations and $899 for Ontario incorporations (including all government filing fees and disbursements). Our packages include:

• Electronic Minute Book
• Articles & Certificate of Incorporation
• Corporate By-Laws & Resolutions
• Share Subscriptions & Share Certificates
• Registers & Ledgers
• Form 1 & Form 2 Initial Returns
• Corporate Name Searches (Pre-Nuans & Nuans)
• Business Number/Tax Accounts from CRA
• Electronic Signing through Docusign
• Legal Advice & Consultation

For additional information, please feel free to contact us by phone at 416.849.1900, or schedule a call with us by clinking the link below

For more general information on incorporating in Ontario or starting a business in Ontario, please view our guide here: Incorporate in Ontario and Canada- Everything You Need to Know.

---

Chartered Professional Accountants in Ontario who wish to practice their profession through a corporation may only do so through a Professional Corporation.   

A CPA Professional Corporation is simply a corporation that is subject to the conditions set out in the Ontario Business Corporations Act (the “OBCA”) and the rules and regulations mandated by the CPA Ontario (“CPA”).

In addition to the rules and regulations which are summarized below, a major difference between professional and non-professional corporations is liability protection. A Chartered Professional Accountant will not be able to limit or shield their personal liability with respect to professional obligations if they operate through a CPA Professional Corporation. If there is a claim against the Chartered Professional Accountant for professional misconduct, for example, the Chartered Professional Accountant and the CPA Professional Corporation would be jointly and severally liable to satisfy all professional liability claims and would rely on their professional liability insurance to satisfy such claims.

Restrictions/Regulations

A CPA Professional Corporation is subject to the following restrictions/regulations:

• Jurisdiction. Chartered Professional Accountants are not permitted to use a federal corporation for their professional corporation. For Chartered Professional Accountants licensed in Ontario, a professional corporation must be an Ontario corporation.
• Name of CPA Professional Corporation. A CPA Professional Corporation is subject to strict naming conventions. The name of the corporation: 
  • must adhere to the CPA Professional Corporation name guidelines, which are currently found here:
  • must include the ending “Professional Corporation”.
• Articles of Incorporation. The Articles of Incorporation of the CPA Professional Corporation must include certain restrictions:
  • Business Restriction in Article 5 of the Articles of Incorporation. The CPA Professional Corporation may not carry on a business other than the practice of the profession as defined in the bylaws of the Chartered Professional Accountants of Ontario or activities which are ancillary to that practice, including the investment of surplus funds earned by the Law Professional Corporation.
  • Restrictions on the Transfer/Ownership of shares in Article 8 of the Articles of Incorporation. All of the issued and outstanding shares of the CPA Professional Corporation shall be legally and beneficially owned, directly or indirectly, by one or more Chartered Professional Accountants, other CPA Professional Corporations, or both.
• Directors and Officers. Only Chartered Professional Accountants can be directors and officers of the CPA Professional Corporation.
• Obtaining a Certificate of Authorization. Once incorporated a Chartered Professional Accountant must apply to CPA Ontario for a Certificate of Authorization. A Chartered Professional Accountant is not permitted to practice their profession through a professional corporation until this certificate has been issued. The Certificate of Authorization may be rejected if the corporation is not compliant with all the restrictions/regulations set out above. A form for the application can be found here.

As part of the application, the Chartered Professional Accountant will need to:

• Provide information about the name of the Professional Corporation and the directors, officers and shareholders.
• Provide information about the various practice addresses of the Chartered Professional Accountants.
• Upload a copy of the Certificate and Articles of Incorporation for the Law Professional Corporation;
• Pay the applicable fee to CPA Ontario.
• Submit the certificate of Authorization (COA) through your CPA Ontario Portal
• Renewing your Certificate of Authorization. The Certificate of Authorization for a CPA Professional Corporation must be renewed every year. As part of the renewal process the Chartered Professional Accountant will need to do the following:
  • Complete the renewal application
  • Pay the Renewal Fee

Why Incorporate a professional corporation? / What are the advantages of  Professional Corporation? / Should I incorporate a Professional Corporation?

• Tax Benefits. The main reason a Chartered Professional Accountant will want to incorporate a CPA Professional Corporation is for tax savings. By incorporating a CPA Professional Corporation, Chartered Professional Accountants will be able to take advantage of the small-business deduction that is available on active business income for Canadian Controlled Private Corporations. By forming a CPA Professional Corporation, Chartered Professional Accountants will have the ability to leave behind a portion of their business income in the CPA Professional Corporation and ultimately defer the payment of personal taxes on this income until the professional decides to pay themselves.
• Liability Protection. Although Chartered Professional Accountants cannot limit personal responsibility with respect to professional obligations, the CPA Professional Corporation does provide liability protection for non-professional obligations that are entered into by the professional corporation. For example if the CPA Professional Corporation is the tenant on a lease and no personal guarantee/indemnity is provided by the Chartered Professional Accountant, the landlord would only be able to claim against the CPA Professional Corporation in the event of a default under the lease.

Do I need a Section 85 Rollover – Transitioning from a Sole Proprietorship to a Professional Corporation (Rollovers)

Generally speaking, when a Chartered Professional Accountant transfers assets from a sole proprietorship to a corporation they will trigger a tax event for the sole proprietor who would be deemed to have disposed of the assets of the sole proprietorship at its fair market value. The Section 85 rollover allows the transfer of the assets from a sole proprietorship to a corporation on a tax deferred basis. Accountants will often recommend that Chartered Professional Accountants complete the transfer and file the joint election form in connection with their goodwill and other assets.

At Ordower Law, we can assist with your incorporation needs. Feel free to give us a call at 416.849.1900. You can book a call with us here.

For more general information on incorporating in Ontario or starting a business in Ontario, please view our guide here: Incorporate in Ontario and Canada- Everything You Need to Know.

---

Social Workers and Social Service Workers in Ontario that wish to practice their profession through a corporation may only do so through an Ontario professional corporation.  A Social Work Professional Corporation or Social Service Work Professional Corporation is simply a corporation that is subject to the conditions set out in the Ontario Business Corporations Act (the “OBCA”) and the rules and regulations mandated by the Ontario College of Social Workers and Social Service Workers (“OCSWSSW”).

In addition to the rules and regulations which are summarized below, a major difference between professional and non-professional corporations is liability protection. A social worker or social service worker will not be able to limit or shield their personal liability with respect to professional obligations if they operate through a Social Work Professional Corporation or Social Service Work Professional Corporation. If there is a claim against the social worker or social service worker for professional misconduct, for example, the Social Worker and the Social Work Professional Corporation or the Social Service Worker and Social Service Work Professional Corporation would be jointly and severally liable to satisfy all professional liability claims and would rely on their professional liability insurance to satisfy such claims.

Restrictions/Regulations

A Social Work Professional Corporation is subject to the following restrictions/regulations:

• Jurisdiction. Social Workers and Social Service Workers are not permitted to use a federal corporation for their professional corporation. For Social Workers and Social Service Workers licensed in Ontario, a professional corporation must be an Ontario corporation.

• Name of Social Work Professional Corporation. Social Work Professional Corporations and Social Service Work Professional Corporations are subject to strict naming conventions. The name of the corporation:  

• may include the licensee’s given names or initials;
  • must include the licensee’s surname as it appears on file with OCSWSSW; and
  • must include the ending “Social Work Professional Corporation” or “Social Service Work Professional Corporation”, as applicable.

Social Workers and Social Service Workers wishing to advertise to the public under a different practice/clinic name, will have to file a separate business name registration and disclose this practice name to OCSWSSW.

• Articles of Incorporation. The Articles of Incorporation of the Social Work Professional Corporation and Social Service Work Professional Corporation must include certain restrictions:

• Business Restriction. The Corporation may not carry on a business other than the practice of social work or social service work, as applicable, or activities which are ancillary to such practice, including the investment of surplus funds earned by the Professional Corporation.
• Restrictions on the Transfer/Ownership of shares. Each share of the Social Work Professional Corporation must be owned by a member of the OCSWSSW.

• Directors and Officers.
• Only social workers who are also shareholders of the Social Work Professional Corporation can be directors and officers of the Social Work Professional Corporation.
• Only social service workers who are also shareholders of the Social Service Work Professional Corporation can be directors or officers of the Social Service Work Professional Corporation

• Obtaining a Certificate of Authorization. Once incorporated a Social Worker or Social Service Worker must apply to OCSWSSW for a Certificate of Authorization. Social Workers and Social Service Workers are not permitted to practice their profession through a corporation until this certificate has been issued. The Certificate of Authorization application may be rejected if the corporation is not compliant with all the restrictions/regulations set out above.

The application for a Certificate of Authorization is required to be submitted in accordance with the instructions of the OCSWSSW.

As part of the application, the Social Worker or Social Service Worker will need to:

• Complete the application form including a statutory declaration.
  • Upload a copy of the Certificate and Articles of Incorporation for the Professional Corporation.
  • Upload a recent Certificate of Status. This report must be ordered from the Ontario Ministry.
  • Pay the applicable fee to OCSWSSW. 

• Renewing your Certificate of Authorization. Certificates of Authorization for Social Work Professional Corporations and Social Service Work Professional Corporations must be renewed annually. As part of the renewal process the Social Worker or Social Service Worker will need to do the following:
  • Complete the renewal application
  • Upload a current Certificate of Status
  • Pay the Renewal Fee

Why Incorporate a professional corporation? / What are the advantages of a Professional Corporation? / Should I Incorporate a Professional Corporation?

For professionals, some of the main reasons to incorporate are:

• Tax Benefits. The main reason a Social Worker or Social Service Worker will want to incorporate is for tax savings. By incorporating a Social Work Professional Corporation or Social Service Work Professional Corporation, the professional will be able to take advantage of the small-business deduction that is available on active business income for Canadian Controlled Private Corporations. By forming a Social Work Professional Corporation or Social Service Work Professional Corporation, social workers and social service workers will also have the ability to leave behind a portion of their business income in the Professional Corporation and ultimately defer the payment of personal taxes on this income until the professional decides to pay themselves.

• Liability Protection. Although Social Workers and Social Service Workers cannot limit personal responsibility with respect to professional obligations, the Social Work Professional Corporation and Social Service Work Professional Corporation does provide liability protection for non-professional obligations that are entered into by the professional corporation. For example if the Social Work Professional Corporation is the tenant on a lease and no personal guarantee/indemnity is provided, the landlord would only be able to claim against the Social Work Professional Corporation in the event of a default by the Professional Corporation under the lease.

• Saleability. If you are looking to exit your business at some point, you’ll have more options when selling a corporation. You can sell the assets of the company or the shares. Buyers usually want to buy assets (as they get to depreciate them again at higher values) and sellers typically want to sell shares (as the lifetime capital gains exemption may be available). It’s not really possible to sell a sole proprietorship itself, although you can sell the assets you used (equipment, for example). Buyers examine factors such as profitability, net worth and market position when looking at your corporation. Keep in mind, anyone purchasing the shares of your corporation will have to be a Social Workers or Social Service Workers, as applicable!

• Growth. A Professional Corporation is capable of having many shareholders so long as they meet the requirements of the OCSWSSW. This allows others to get involved, take an ownership interest and become invested in the future success of the business. It’s just a better way to combine resources and share the spoils. With a sole proprietorship, it’s just you. If you want your business to grow, it helps to have multiple perspectives and ideas and different people with a vested interest.

Do I need a Section 85 Rollover – Transitioning from a Sole Proprietorship to a Professional Corporation (Rollovers)

Generally speaking when you transfer assets from a sole proprietorship to a corporation you will trigger a tax event for the sole proprietor who would be deemed to have disposed of the assets of the sole proprietorship at its fair market value. The Section 85 rollover allows the transfer of the assets from a sole proprietorship to a corporation on a tax deferred basis. Accountants will often recommend that professionals complete the transfer and file the joint election form in connection with their goodwill and other assets. Whether or not you require a rollover is a question for your accountant.

At Ordower Law, we can assist with your incorporation needs. Feel free to give us a call at 416.849.1900. You can also book a call with us here.  If you would like us to assist with incorporating your professional corporation  please let us know- we are happy to assist.

For more general information on incorporating in Ontario or starting a business in Ontario, please view our guide here: Incorporate in Ontario and Canada- Everything You Need to Know.

---

There are several different types of business structures that exist, which you should keep in mind when setting up your business. You have several options: you may operate as a sole proprietorship, a partnership (a general partnership, limited liability partnership, or limited partnership), or a corporation. In this article, we will give you a brief overview of each type of business structure, as well as the advantages and disadvantages of incorporating.

SOLE PROPRIETORSHIP:

A sole proprietorship is an unincorporated business that is owned by one single individual. It is the simplest kind of business structure, where the owner has responsibility for all decision making, receives all profits, and claims all losses. The owner of the business personally has no separate legal status from the business, which means that creditors can come after the owner’s personal assets as a way to satisfy debts owed by the business. In other words, the risks of the business extends to the owner personally.

The owner of a sole proprietorship pays personal income tax on the net income generated by the business. As the owner, you may either register a business name or operate under your own name. This type of business structure is often popular with sole owners of businesses, individual self-contractors, and consultants. It is very easy to set up (the sole proprietorship begins the moment you begin conducting business) and does not require much maintenance.

PARTNERSHIP:

Legally, a partnership is formed whenever two or more persons carry on business with a view to profit. There are three main categories of partnerships: general partnerships, limited liability partnerships, and limited partnerships.

General Partnership:

A general partnership is relatively easy to establish between 2 or more partners. There are no formal legal requirements. It is more complex than a sole proprietorship and less so than incorporation. You would need a registered trade name, a registered tax number for applicable taxes, and a bank account. The owners of a general partnership pool their funds in order to raise capital. Public reporting isn’t required, but general purpose financial information may be needed to satisfy the bank, vendors, and tax collectors. In terms of taxation, each partner is taxed personally on his or her share of the partnership income (making a tax return for the general partnership itself unnecessary). Importantly, each partner is liable for all the assets and liabilities of the partnership. If the company is sued, each partner’s personal assets can be seized to settle the claims. In other words, partners have unlimited liability (unlike a corporation, where creditors can only look to the assets of the business and not the owners personally to satisfy the debt).

Often, the partnership is memorialized in a partnership agreement (usually written, although oral agreements are legally valid as well). In many cases, partners will agree to proceed with major decisions only if there is unanimous consensus, or majority consensus. An agreement is important since all partners have unlimited liability, meaning partners can be on the hook for the inappropriate or illegal actions of the other partners.

General partnerships dissolve when one partner leaves the partnership. However, provisions can be added into the partnership agreement for this contingency – for example, if one partner dies, their interest may be transferred to the surviving partners, or alternatively, a successor.

Limited Liability Partnership (LLP):

An LLP allows firms to retain their partnership structure while protecting the personal assets of partners who have no involvement in a negligence action. The firm is liable for the acts committed by its members in the ordinary course of the business of the firm, but individual members are not liable for each other’s acts. They must, however, continue to maintain responsibility for their own acts and for those they have a supervisory role over. In a limited liability partnership, each partner’s liability is limited to the amount of capital they invest into the business. Partners in a limited liability partnership are generally liable for all business obligations of the business, but are not liable for the other partner’s tortious (i.e. negligent) acts. A limited liability partnership is somewhat of a hybrid structure: somewhere between a corporation and a partnership. Like a corporation, an LLP is a corporate body and therefore a separate legal entity and partners’ liability is limited. However, like a partnership, the relationship between the partners is governed by a private agreement.

Limited Partnership (LP):

In a limited partnership, there are what we call “general” and “limited” partners. The general partner is liable for all the debts and obligations of the partnership and is in charge of the daily management of the business. The role that a general partner plays is similar to any partner in a general partnership. A limited partner (also known as silent partners), on the other hand, has limited liability. In other words, their liability is limited to their investment into the business. Importantly, limited partners cannot take part in the management of the business (though they can contribute capital). If the limited partner is listed as a limited partner on paper, yet in substance helps to manage the business, then they will be deemed to be a general partner, and their limited liability status ends.

CORPORATION:

A corporation is a distinct legal entity that is separate from its owners. A corporation operates and has the same rights, under law, as a legal person (meaning me or you) – which means that it can enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, pay taxes, etc. We’ve included some of the benefits and drawbacks of incorporating your business below.

There are many advantages to incorporating, including limited liability, lower tax rates, perpetual existence (which has impacts on succession planning), and may give you easier access to capital.

ADVANTAGES:

Limited Liability:

Unlike a sole proprietorship, where the owner must assume all the risks of the business (which puts even the owner’s personal property and assets at risk from business creditors), the owners of a corporation (these are shareholders – the amount of shares each shareholder holds in the company represents their percentage ownership in that business) have limited liability. This means that the losses that the owners of the corporation may incur is limited to the amount of capital they invested in the business. Creditors cannot go after your personal assets or property to recover debts of the business. (That would be like recovering money from person A to satisfy the debts of person B – remember, a corporation is its own legal entity, or person!)

Lower Tax Rates:

If you are operating as a sole proprietor, you would pay personal income tax on the net income generated by your business. In Canada, corporate tax rates for small business can be quite low when compared to personal tax rates. Incorporating provides the opportunity to save or defer taxes. For example, the Small Business Deduction may apply if your company qualifies as a Canadian-Controlled Private Corporation (CCPC). (Some of the requirements to qualify as a CCPC include: being a private corporation; having either been incorporated in Canada or residency in Canada; and that it is controlled by a person who is a resident of Canada.) The Small Business Deduction applies to the first $500,000 that your company makes each year. Additionally, your shares may qualify for a Lifetime Capital Gains Exemption if they are deemed to be qualified small business corporation shares. This can reduce the amount of taxes you pay when you leave the business.

Perpetual Existence:

A corporation, unlike a sole proprietorship, lasts forever and continues to exist even after the death of its owner(s). This stability allows you to plan over a long-term, provides flexibility when transferring assets to others, and allows you to leave your legacy into the future.

Easier Access to Capital:

Raising capital is generally easier for a corporation, as corporations can issue shares of stock. This is a way for corporations to raise money from investors who invest in the company and become shareholders. In exchange for their investment, shareholders may have a stake in the company’s equity as well as a share in its profits in the form of dividends – depending on the types of shares they possess. Additionally, often banks will be more willing to lend money to a corporation as opposed to an unincorporated business.

DISADVANTAGES:

Some of the disadvantages of incorporating include increased expenses and administrative work, and the more complex process of closing a corporation.

Increased Expenses:

One downside of incorporating is the expenses that come with it. By nature, corporations are more complex than other types of structures – some of the fees that are required include incorporation fees (such as a NUANS name search report, and the government application fee when you incorporate), or any additional accounting fees, depending on how complex your finances are. You will have to file two separate tax returns each year – one for your personal income and one for the corporation.

Increased Administrative Work:

The government requires corporations to keep an up-to-date Minute Book, and to keep them updated on any changes, such as directors lists or registered address. They also require that you update certain corporate records.

Closing a Corporation is more Complex:

To close your corporation, you must pass a corporate resolution (which is a written document created by the Board of Directors detailing a binding corporate action) to dissolve the corporation, wind up payroll accounts, and send a copy of the certificate of dissolution to your provincial authorities (or the CRA).

THE BOTTOM LINE:

As you can see, there are a variety of different business structures which you can opt for when starting your business. The decision is personal and based on your own business needs. Your business’s legal structure determines your tax rates, management/paperwork requirements, and more. There are pros and cons to each – for example, sole proprietorships and partnerships are relatively easy to start but lack liability protection. Corporations may take more work to start but offer liability protection and potentially more favourable tax rates. We offer free 30-minute consultations here at Ordower Law: please feel free to schedule a call with one of our team using this link.

For more general information on incorporating in Ontario or starting a business in Ontario, please view our guide here: Incorporate in Ontario and Canada- Everything You Need to Know.

---

There are a number of reasons to operate your business through a corporation (check out our blog about reasons to incorporate here), but the tax benefits that are available to corporations is one of the most important.

Accordingly, if you are trying to decide whether or not you should retain an accountant for your corporation/business, the answer is that you absolutely should.  An accountant understands the tax benefits and credits that are available to you. In addition to minimizing your taxes, maximizing your savings, reducing costly mistakes and ensuring compliance, working with an accountant will give you peace of mind and save you time that is better spent on what you know best – your business. 

Of course there is a cost to working with an accountant. When you incorporate, you are creating a new person at law and this new person has its own identity, its own tax number, and has to file its own tax return. By incorporating, you have automatically taken on a new obligation. In addition to filing a personal tax return each year, you will also have to file a tax return for your new corporate person.

In order to understand why you need an accountant, it’s important to understand some of the general Tax Benefits available to corporations:

1. Tax Deferral. By forming a corporation, you can control the money you pay yourself. Effectively, you control the amount of personal income you’ll have to declare each year on your personal tax return. If you were operating your business as a sole proprietor, all of your taxable income (ie. Your revenue less expenses) would be reported on your personal tax return in applicable financial year, and tax would be payable at your personal marginal tax rate.

• Small Business Deduction. If your company qualifies as a Canadian Controlled Private Corporation (meaning that it is not controlled by non-Canadians or public corporations), you may be able to take advantage of the small business deduction. The small business deduction is a reduced rate of tax (or a tax credit) that is applied on the first $500,000 of the Corporation’s active business income.

It is important to note that not all CCPC’s qualify for this small business deduction. For example, corporations which are considered personal service corporations will not be entitled to the small business deduction. In addition, you may have to share the small business deduction limit (ie. the $500,000) with associated companies. Even if you don’t qualify for the small business deduction, there are other reasons to incorporate, including other tax benefits (see article).

• Lifetime Capital Gains Exemption. The lifetime capital gains exemption is a forward-looking consideration when you’re starting your business. Generally speaking, you have to pay capital gains tax on the proceeds of sale of investments, including for example the sale of real estate (other than your principal residence).   In addition, the proceeds of sale of the shares of a corporation that a Canadian (PR or citizen) has owned for a minimum of two years may be exempt from capital gains tax on a maximum of approximately $800,000 during each individual’s lifetime.

• Income Splitting. You may also be able to benefit from certain income splitting arrangements with family members. The basic premise is simple – by issuing family members shares of the corporation, dividends can be paid to lower income earning family members. Those family members will then declare the dividend income on their personal tax returns. Since they are lower income earners, they will pay less tax on that money.  The concept is simple, but it’s not that easy. In the past a higher tax was applied on income that was split by parents with their children so the parents could reduce their personal taxes. New rules that were enacted in 2017 expanded the tax that can be applied on split income to adults. Nevertheless, income splitting is still available in certain circumstances and understanding whether or not tax will apply on split income is an important tax consideration.  

So why do you need an accountant.

The simple answer is that taxes are hard to understand and figure out and the chartered professional accountant is going to be able to help you navigate this and see the forest through the trees!  

An accountant will understand if you can split income with family members or rely on the small business deduction to reduce your corporate taxes. They will let you know whether an association will be created when you incorporate a second company and they will help ensure that you keep your accounting/financial records in good order.

Often people will incorporate on their own and then realize the cost to fix the initial mistake in their articles of incorporation is more than they would have paid if they worked with us from the start. Similarly, you don’t want to incorrectly rely on the small business deduction if you’re a personal service corporation, or pay a dividend to a family member and realize later that the tax on split income had to be applied. Mistakes on taxes can be costly. Reassessments by CRA done years after your tax return has been filed may not only result in additional tax payable to CRA but could result in interest payable on the difference between what you actually paid and the reassessed amount you should have paid during that period.

In addition, your relationship with an accountant will continue through your corporation’s life and is an important relationship to foster. Your accountant will act as a trusted advisor for your business as it grows. They will be able to look at your personal and corporate financial records and offer tax planning advice, including when you should pay yourself, how much you should pay yourself, whether or not you should pay family members, whether you should freeze certain assets for estate planning purposes or distribute assets to minimize taxes.

When should you engage an accountant?

The best time to engage an accountant if you don’t already have one, is at the incorporation stage either before or quickly following the incorporation. If you have decided to incorporate without speaking to an accountant first, that’s ok.  You can read our articles about whether or not to incorporate here.

However, if you are incorporating, having an initial consultation with an accountant to determine what tax accounts you should register for (ie. HST/Payroll), what the year end for your corporation should be and to set up your administrative bookkeeping processes will minimize costs and mistakes and maximize savings. If you get an accounting consult for your start-up, you may not need to speak to an accountant until your tax return is due.

A bookkeeper is also an important part of the accounting process, and most accountants will be able to introduce you to bookkeepers who are familiar with the monthly bookkeeping requirements for your business. While many still use spreadsheets to track accounting, web-based accounting software can make it easy to enter the necessary data and have a bookkeeper simply complete monthly reconciliations. At the end of the day, when it comes to bookkeeping, sometimes the question is not can you do it on your own, but will you?  Similar to an initial investment with an accountant, it may also be worth paying a bookkeeper to help set up your backend accounting processes, billing, expense reporting, sales and inventory tracking, etc.   Even though at the start, you may not need a bookkeeper on a regular basis, as your business grows, your bookkeeping could take a backseat and that can be costly.

Keep in mind that when it comes to corporations, bookkeepers and accountants serve different roles, both of which are valuable. If you are worried about accounting costs as you start your business, speak with an accountant to understand their fees and scope of work.  You will be able to keep fees down by understanding how to record revenue, track and file expenses, reconcile on a monthly basis and record all other financial transactions of the business.

How to find the right accountant.

It can be hard to know whether your accountant is the right one for you. You want an accountant who understands your business needs and whose advice you can trust and rely on.  

In addition to relying on online reviews or finding someone who provides services in your area, getting recommendations from a trusted friend, colleague or professional can be quite valuable.

At Ordower Law we have built relationships and work with a number of accountants across Ontario and work closely with them in connection with incorporations, annual compliance, tax reorganizations and purchase/sale transactions. The accountants we know understand the accounting needs of small and medium sized businesses and are responsive to new clients. Whether you simply want to have contact information for someone you can call when you have to file your tax return, you want an initial consultation to get your backend bookkeeping processes set up, or you want to retain an accountant for future tax filings, we are happy to make the introductions.

We strongly believe that having proper accounting practices in place and a trusted Chartered Professional Accountant in your corner will help support the continued growth and success of your business.

Let us know if you would like an introduction to an accountant by clicking here.

For more general information on incorporating in Ontario or starting a business in Ontario, please view our guide here: Incorporate in Ontario and Canada- Everything You Need to Know.

---

Personal Real Estate Corporations in Ontario

Until recently, Ontario Realtors were getting the short end of the stick. 

While other professionals, including doctors, lawyers, dentists and accountants, were able to take advantage of lower corporate tax rates by choosing to operate their practice/profession through a professional corporation, real estate agents could only operate as sole proprietors. This meant that all real estate commissions earned by a real estate agent were subject to tax at their personal tax rates instead of the lower small business tax rate that other professionals were able to take advantage of.

In 2021, a new regulation was introduced under the Real Estate and Business Brokers Act (Ontario) which gave real estate agents in Ontario the right to operate their real estate business through a personal real estate corporation (often referred to as  “PREC”), and have any remuneration owed to them paid by their brokerage to the PREC.  

With the introduction of this regulation, Ontario realtors are finally able to take advantage of the tax savings offered to other regulated professionals.

So, what is a PREC? What are the benefits? And how do you know if this is the right option for you? This article will cover all the information you need to decide whether this is the incorporation for you!

What is a Personal Real Estate Corporation (PREC)?

A Personal Real Estate Corporation (or PREC) is simply a corporation that is incorporated in Ontario but that is subject to certain regulations and restrictions in the way it can be organized, who it can issue shares to and what kind of remuneration it can receive. The PREC must be compliant with the requirements set out in the regulations in order for real estate agent’s brokerage to be permitted to pay the real estate’s remuneration to the PREC.

Although a PREC is not considered a professional corporation under the Business Corporations Act (Ontario), it functions in a very similar way.

How does a PREC need to be organized?

The Real Estate and Business Brokers Act and applicable regulation, prescribes how the PREC must be organized and operate. In particular:

• The PREC must be an Ontario corporation.

• The PREC, its controlling shareholder and others must not represent to the public that the PREC trades in real estate. Remember, it is the individual real estate agent (and not the PREC) that is regulated by RECO.

• A single real estate agent must be the sole director and officer of the PREC.
  

All of the equity shares of the PREC must be owned by the single real estate agent.  However, A holding company can also own the equity shares of the PREC so long as the real estate agent owns all of the equity shares of the holding company and is the also the sole director and officer of the holding company.  “Equity shares” is defined under the Real Estate and Business Brokers Act as “voting shares”. 

• Family members may be issued non-equity shares of the PREC or the holding company, as applicable.  “Non-Equity Shares” means “non-voting” shares and “family” is narrowly defined to mean the real estate agent’s: (1) spouse; (2) child(ren); and (3) parent(s).

• A brokerage can only pay commissions to a PREC for one real estate agent.  This means that if spouses are both real estate agents, each spouse would have to incorporate their own PREC or, if the spouses operate as a team, all “family” commissions could be run through the PREC of one spouse while the other is employed by and is a non-voting shareholder of that PREC.

Why should I incorporate a PREC? What are the benefits? What are the risks?

Now that you understand what a PREC is, it is important to look at the Pros and Cons of incorporating a Personal Real Estate Corporation.

Benefits of Incorporating a PREC:

• Tax Savings: The main reason a real estate professional will want to incorporate an Ontario Personal Real Estate Corporation is for tax savings.  By incorporating a PREC, real estate agents will be able to take advantage of the small-business deduction that is available on active business income for Canadian Controlled Private Corporations. The corporate tax rate is ~12.5%

• Tax Deferral: By forming a PREC, real estate agents will also have the ability to leave behind a portion of their business income in the PREC and ultimately defer the payment of personal taxes on this income until the real estate professional decides to pay themselves.

• Flexibility of Remuneration: PRECs allow you to access different types of payment options. Generally speaking the PREC can pay the real estate a dividend or the real estate agent can be an employee of the PREC and receive a salary.     

• Income Splitting: Because the regulations allow family members to own non-equity/non-voting shares of a PREC, real estate agents may be able to benefit from certain income splitting arrangements. By issuing family members non-voting shares of the PREC, dividends can be paid to those shareholders in amounts and at times determined by the real estate agent. Those family members will then have to declare the dividend income on their personal tax returns instead of the real estate agents.  Prior to issuing shares to family members or declaring dividends, you should speak to your accountant. Tax rules relating to income splitting are important to understand because the ability to income split with family members is subject to certain restrictions. Make sure you speak to your accountant before deciding to do so.

Costs with Incorporating a PREC:

• Initial Incorporating Fees and Transitional Costs. First there is the cost of incorporating. There may also be additional costs associated with the transition of your real estate business from a sole proprietorship to a corporation. For example, if you required the paperwork to effect the s.85 rollover.  During the transition to the corporate structure, you would need to close down your existing business registrations/HST numbers and obtain new tax accounts.  

• Accounting Costs. The negative side of incorporating a PREC is the increased cost and paperwork compared to your everyday sole proprietorship. In addition to the incorporation fees, you may also need to spend more money yearly on bookkeeping and accounting costs for corporate filings.

What is the difference between a PREC and a Traditional Corporation?

As mentioned earlier, a PREC in Ontario restricts who can be a director, officer and/or shareholder. You don’t need a special type of corporation, and can even use an existing Ontario corporation that you have incorporated in the past, so long as it is properly organized in accordance with the restrictions mentioned above (i.e. so long as the real estate agent is the sole director, officer and equity shareholder; and any other shareholders are family members holding non-equity shares.)

Another major difference is liability protection. Similar to professional corporations, real estate agents cannot shield their professional liability. It is the individual real estate agent, and not the PREC, that remains the licensee/registration with RECO and the insured party. Accordingly, when deciding whether to move your estate business from a sole proprietorship to a PREC, the main consideration is your ability to take advantage of the small business deduction which lowers corporate income tax rates on active business income.

How do PRECs work?

When the personal real estate corporation is formed, you have created a new person at law that receives the revenue, pays the expenses and is a separate taxpayer for your real estate business. Once incorporated CRA will automatically assign a new business number to this corporation. Your PREC will need to register for a new HST number and a payroll number, if applicable. ]

Since the PREC, and not the real estate agent, will be receiving the commissions from the brokerage, any money paid to the real estate agent personally will generally be paid from the PREC to the real estate agent by way of dividend or salary.  By leaving money in the PREC (i.e. savings over and above your living expenses), you will be effectively lowering your income tax burden in a given year and can use the savings from that tax deferral for other investment purposes.

Should I set up a holding company to own the shares of my PREC?

Often real estate agents will incorporate a PREC and a holding company at the same time. The holding company will become the shareholder of the PREC instead of the real estate agent personally. The holding structure has benefits if you are planning on purchasing certain types of investment or other property.

The holding company structure allows the PREC to send dividends up to the holding company by way of inter-corporate tax-free dividend. The holding company can then purchase investment property directly.  By setting up this structure, you are keeping your investment properties separate from the PREC and you do not have to pull out the money personally and pay tax on it in order to use it to purchase property.

What is a Section 85 Rollover?

A section 85 Tax Rollover is a special taxing technique. It allows you to transfer assets from a sole proprietorship to a corporation and defer the capital gains tax that could otherwise be payable by a sole proprietorship on the fair market value of the assets being transferred/sold.

If your accountant recommends that you complete a rollover, first you would determine the Fair Market Value of the goodwill of your sole proprietorship real estate business.  You would then enter into an agreement with your PREC whereby the PREC would agree to purchase the goodwill at the fair market value determined.  The PREC would then pay the individual real estate agent for the goodwill by issuing the real estate agent a certain number of shares of the PREC. Your accountant would then be required to file a s.85 form with CRA.

Do I need a Section 85 Rollover?

You should be aware that there may be tax issues to consider when  moving from a sole proprietorship to a PREC. You may need to transfer the goodwill of your business to the PREC on a tax deferred basis by doing a Section 85 rollover. Whether or not a s.85 rollover is advisable or necessary in your circumstances is something that you should discuss with your accountant directly. 

Now that I understand PRECs, what are the next steps to take in order to incorporate it?

Before starting the process of incorporating, it is important to speak to an accountant and a lawyer to understand if a PREC is the right option for you. Although setting up a PREC is simply setting up an Ontario corporation, you will want to make sure that your articles of incorporation authorize the issuance of different classes of equity and non-equity shares in order to give you flexibility for income splitting.  

Once incorporated, you will need to set up a new bank account, obtain a new HST number and Payroll number is recommended by your accountant, inform RECO about your PREC by email, enter into an agreement with your brokerage and the PREC and provide your brokerage with any information they require for compliance purposes.

Here at Ordower Law, we are committed to ensuring that this process is as smooth as possible for you. To help you with incorporating your PREC, we offer a full service offering including incorporation and organization of your company, professional intros, informing RECO about your corporation and traditional corporate services beyond that.

For more general information on incorporating in Ontario or starting a business in Ontario, please view our guide here: Incorporate in Ontario and Canada- Everything You Need to Know.