Transitioning from Sole Proprietorship to Incorporation in Ontario: Bookkeeping Essentials

As a Canadian business owner, transitioning from a sole proprietorship to a corporation is a major milestone. Whether you're aiming for tax advantages, limited liability, or more credibility with clients and lenders, incorporation offers important benefits. But with that change comes new bookkeeping and compliance responsibilities under Canadian law.

Here’s a breakdown of what to know from a bookkeeping perspective as you make the move.

Once you've chosen to incorporate, the sole proprietorship technically ends. You’ll need to

• Finalize and reconcile all transactions up to the incorporation date.
• Record any final owner’s draws and clear outstanding A/R or A/P.
• Prepare your final personal tax return with the T2125 (Statement of Business or Professional Activities) for the sole proprietorship.

After incorporating federally or provincially, you must:

• Register for a new Business Number (BN) with the Canada Revenue Agency (CRA).
• Set up a new chart of accounts for the corporation (this is a separate legal entity).
• Open a new business bank account in the corporation’s name (do not reuse the old sole prop account).

If your sole proprietorship was registered for GST/HST, you need to:

• Cancel the old GST/HST account tied to your sole proprietorship.
• Register a new GST/HST account under the corporation’s new BN.
• Track GST/HST collected and paid separately from your previous business records.

Any cash or assets you contribute to the new corporation should be recorded as:

• Shareholder loans or
• Paid-up capital, depending on how the transaction is structured. Ensure the transfer is documented properly in your books — and potentially in your minute book.

As a sole proprietor, you likely just drew income directly. As a corporation:

• You may need to pay yourself through payroll, issuing T4s, with holding CPP and income tax, and remitting to the CRA monthly or quarterly.
• Alternatively, you can pay yourself dividends—but these require tracking retained earnings and filing T5 slips.
• Use a proper payroll system or work with a bookkeeper to ensure compliance.

Unlike a sole proprietorship (which is reported on your personal return), corporations must file:

• T2 Corporate Tax Return
• Annual Resolutions and potentially maintain a minute book Keep accurate financial records to support your return and future audits.

If you were managing your books in Excel or manually, now isthe time to move to software like QuickBooks Online (Canada).

These tools help manage GST/HST, payroll, and CRA reporting more easily.

Incorporatingin Canada is more than a legal formality — it’s a new financial life for your business. With a clean bookkeeping transition, you’ll set your corporation up for success with CRA compliance and better financial clarity.

Need help converting your books from sole prop to corporation in Canada? We specialize in Ontario small business bookkeeping and CRA compliance. Reach out today for a free consultation!