Almost nobody regrets incorporating. But a lot of people are blindsided in the first eighteen months, and it's rarely because the tax was higher than expected. It's because the timing was nothing like what they were used to, and because several obligations that used to be one thing quietly became two.
None of what follows is exotic. It's just the set of things that a sole proprietor has no reason to know, and that nobody sits down and explains at the moment of incorporation.
- You are now two taxpayers. The corporation files a T2; you file a T1. The money in the business account belongs to the corporation, not to you.
- You choose your first year-end — any date within 53 weeks of incorporation — and you're stuck with the consequences, so choose deliberately.
- Your GST/HST number does not come with you. The corporation is a new person and must register in its own right. The old proprietorship number doesn't transfer.
- Draws are over. Money now leaves the corporation as salary, as a dividend, or as repayment of a shareholder loan — and if it leaves as none of those, it lands in the shareholder loan account and starts a clock.
- No corporate instalments in year one — then they start in year two, often before you've paid the year-one balance. That overlap is the cash squeeze that catches people.
- Corporate tax is due two months after year-end (three for an eligible CCPC), not on April 30. The return isn't due for six months, but the money is.
Read on for choosing a year-end, the accounts you now need, how money actually gets to you, the year-two squeeze, and the compliance calendar you just signed up for.
One person became two
Everything else in this article is a consequence of this single fact: a corporation is a separate legal person, and it is a separate taxpayer.
As a sole proprietor, your business income was your income. One return, one taxpayer, and every dollar in the business account was already yours — you'd been taxed on the profit whether you withdrew it or not. Moving money to your personal account was a non-event.
After incorporation, none of that is true. The corporation earns the income, pays its own tax on it, and holds the after-tax money. For that money to become yours, a transaction has to happen — and that transaction has its own tax consequences.
Choosing your first year-end
Unlike a proprietorship, which is locked to December 31, a corporation picks its own fiscal year-end. Your first taxation year can end on any date you choose, provided the period doesn't exceed 53 weeks from incorporation. In practice you fix it by filing your first T2 with that date on it.
Source: Income Tax Act, s. 249.1(1) — a fiscal period of a corporation may not exceed 53 weeks.
Three things worth weighing:
- A late first year-end defers tax. Incorporating in March and choosing a February 28 year-end gives you nearly twelve months before the first corporate tax is due — and a longer runway before instalments begin.
- Avoid your busiest season. Year-end means counting inventory, chasing documents and answering an accountant's questions. Landing that in the middle of your peak weeks is a self-inflicted wound.
- Think about your personal year too. A year-end a few months before December gives you room to declare a bonus or dividend and still plan the personal-tax side within the same calendar year.
The date is changeable later, but only with CRA approval and a sound business reason — so it's much easier to get right the first time.
What you have to register, and what doesn't transfer
Your corporation gets a business number, and then separate program accounts hang off it depending on what it does:
- RC — corporate income tax. Where the T2 lives. Usually opened automatically on incorporation.
- RT — GST/HST. Required once the corporation crosses the $30,000 small-supplier threshold, and worth opening voluntarily before that if you're buying a lot of taxable inputs.
- RP — payroll. Required the moment anyone is paid a salary, including you.
- RZ — information returns. For T5s and certain other slips.
Now the part that catches almost everyone: your GST/HST registration does not carry over. The corporation is a different person in law from the proprietorship, so it cannot use the old number. It must register in its own right, and its $30,000 threshold starts fresh from zero.
This produces a specific, common mistake: invoicing under the new corporation while quoting the old proprietorship's GST number. Those invoices don't support your customers' input tax credits, and the tax you collected sits under a registration that no longer relates to the business making the supply. It's a genuinely messy thing to unwind. (See when to register and why the number on the invoice matters.)
One related point if you rolled an existing business into the corporation: transferring the assets is itself a supply for GST/HST purposes, and there's an election that can make the transfer tax-free between two registrants.
Source: Excise Tax Act, s. 167 — the election in respect of a supply of a business or part of a business (filed on form GST44). A transfer of assets to a corporation may also involve a rollover under Income Tax Act, s. 85 — get advice before doing this rather than after.
There is no such thing as a draw anymore
This is the single most common first-year bookkeeping problem, and it's a habit problem rather than a knowledge problem. You've spent years moving money from the business account to your personal account without thinking about it. That reflex doesn't switch off at incorporation.
Money now leaves the corporation in one of three legitimate ways: salary (deductible to the corporation, taxable to you, requires an RP account and source deductions, generates a T4), a dividend (not deductible, taxed differently in your hands, no withholding, generates a T5), or repayment of a shareholder loan (tax-free, but only to the extent you actually lent the corporation money).
Anything else lands in the shareholder loan account as money you owe the company — and if it isn't cleared within one year of the end of the corporation's taxation year in which it was taken, it generally becomes personal income for that year.
Source: Income Tax Act, s. 15(2) and 15(2.6) — a shareholder loan is included in income unless repaid within one year after the end of the taxation year of the lender in which it was made.
The mechanics of each route are in how to pay yourself from your corporation; the choice between them is in salary vs. dividend.
Year one is easy. Year two is where the cash goes.
Here's the timing nobody explains, and it's the reason first-year incorporators get caught short.
A new corporation does not have to pay instalments in its first tax year. There's no prior-year tax to base them on. So year one feels wonderfully simple — you earn, you file, you pay once.
Source: CRA, Who has to pay in instalments — instalments are generally not required for the first tax year after incorporation. Note that the CRA also warns you may have to begin second-year instalments before you pay the first year's balance or file the first return.
Then year two starts, and instalments begin — based on year one's tax. Which means that for several months you are simultaneously paying monthly instalments toward year two and carrying an unpaid balance for year one, which came due two or three months after your first year-end.
Note the shape of it: the year-one tax is due March 31 in this example, but the return isn't due until June 30. Payment precedes filing. If you wait for the accountant to finish the return before thinking about the money, you're already three months late and accruing interest. (An eligible CCPC claiming the small business deduction gets three months rather than two.)
And there's a personal-side echo. If you paid yourself in dividends, nothing was withheld at source — so you may face a substantial personal balance the following April, and then personal instalments after that, once your net tax owing exceeds $3,000 ($1,800 in Quebec) in the current year and in either of the two preceding years.
Source: CRA, Required tax instalments for individuals — who has to pay.
What you're now responsible for filing
As a proprietor you had essentially two recurring obligations: your T1 and, if registered, your GST/HST return. Here's the post-incorporation list.
| Filing | Goes to | When |
|---|---|---|
| T2 corporate return | CRA | 6 months after year-end — tax due at 2 or 3 months |
| Corporate annual return | Your incorporating registry | On the incorporation anniversary — not the CRA |
| T4 / T5 slips | CRA | Last day of February, on the calendar year |
| Payroll remittances | CRA | Usually the 15th of the following month |
| GST/HST return | CRA | By your assigned reporting period |
| Your personal T1 | CRA | April 30 — still yours, still separate |
The second row is the one that gets missed, because it isn't a tax filing at all and no tax software produces it. Skipping it long enough can get your corporation dissolved — the full story is in the annual return is not the T2.
Steph's second spring
Meet Steph, who runs Wildrose Signworks, a sign fabrication and installation shop in Medicine Hat, Alberta. Six years as a sole proprietor, incorporated in January after a strong year, December 31 year-end. First corporate year went well — about $140,000 of pre-tax profit.
She'd taken money out the way she always had: transfers to her personal account whenever the balance allowed, roughly $92,000 across the year. No payroll account, no T4, no dividends declared. Every dollar of it landed in the shareholder loan as money she owed the company.
Three things landed in her second spring at once. The corporate tax on year one was due March 31 — real money, on profit that hadn't been reduced by any salary, because no salary had ever been declared. Year-two instalments had started at the end of January. And the $92,000 shareholder loan was heading toward a personal income inclusion if it wasn't cleared by December 31 of year two.
She hadn't overspent. She'd taken out roughly what she'd taken as a proprietor. The difference is that this time it was the corporation's money, and it left in a form that generated no deduction and no tax planning.
Her business was healthy. Her cash position in March was not.
What should have happened
The transfers themselves weren't the problem — the absence of a decision was. A payroll account opened in January and a modest regular salary would have made those withdrawals deductible to the corporation, withheld tax as she went, produced a T4, and left nothing accumulating in the shareholder loan. Alternatively, dividends declared through the year with money set aside for the personal tax would have worked too.
We fixed it retroactively with a combination of salary and dividends before the deadline, which cleared the loan — but it cost more tax than planning it in advance would have, and the March cash crunch was already spent. A single conversation in the first month of incorporation would have avoided the entire sequence.
Set it up in month one, not month fourteen
The first year incorporated is not harder than being a sole proprietor. It's just structured differently, and almost everything that goes wrong traces back to carrying a proprietor's habits into a corporate structure — treating the bank balance as yours, waiting for the return before thinking about the tax, and assuming the filings you knew about are the only ones there are.
Decide your year-end deliberately. Register the corporation's own GST/HST account. Pick how you're going to be paid and set it up properly in the first month. Reserve for tax and for year-two instalments. And find out who's filing your annual return.
Just incorporated?
The first ninety days are when this is cheap to get right, and expensive to get wrong. A 15-minute call is enough to map out your year-end, your accounts, and how you'll pay yourself.
Book a Free 15-Minute CallThis article is for informational purposes only and does not constitute tax, legal, or accounting advice. Tax rules, thresholds and deadlines change, and how they apply depends on your corporation's circumstances, year-end and province. The figures used are illustrative. Consult a qualified professional about your own situation, particularly before transferring assets into a corporation.
Primary sources, linked so you can read and interpret them yourself. Government links open on official Government of Canada websites.
- Income Tax Act — s. 249.1(1) (fiscal period may not exceed 53 weeks), s. 150(1)(a) (T2 filing deadline), s. 15(2) and 15(2.6) (shareholder loans), and s. 85 (transfer of property to a corporation)
- Excise Tax Act — s. 167 (election on the supply of a business)
- CRA — Who has to pay corporate instalments and Balance due when filing a return
- CRA — Required tax instalments for individuals
- CRA — When to register for and start charging the GST/HST
- Related reading: Should You Incorporate?, How to Pay Yourself From Your Corporation, The Shareholder Loan Trap, The Corporate Year-End Checklist, and The Annual Return Is Not the T2
Rodney Maiato is the founder of CDL Accounting Solutions, a remote bookkeeping practice helping Canadian incorporated small businesses keep clean, audit-ready books without the year-end scramble. He brings 15+ years in accounting — from junior accountant to assistant controller, where he managed a team of 7 and oversaw the books of 25+ companies, plus payroll for 100+ employees across several provinces — and is a Payroll Compliance Professional (PCP) Candidate with the National Payroll Institute. He also builds the automation behind CDL, including its text-in receipt intake system.