How to divide my corporation into two

I run "MY_NAME Consulting Ltd." It's a very small business - I'm the sole director and employee. I have 2 unrelated revenue streams there: 1. 30% of my revenue does indeed come from consulting. 2. 70% comes from a gardening website I run. I want to split this into 2 corporations, mostly just because it will be cleaner to have separate bank accounts, bookkeeping, etc. My question is: if I set up "Gardening Yada Yada Ltd." and start running the gardening website under that name, will it raise any red flags with the CRA that, because of the move, my revenue under "MY_NAME Consulting Ltd." will drop by 70% on my taxes? Would it be better to rename "MY_NAME Consulting Ltd." to "Gardening Yada Yada Ltd." and instead set up "MY_NAME Yada Yada Ltd."?

Asked 8 months ago in Ontario
Categories: Corporate/Commercial  Business Law

Answer Now

Shira Kalfa

Answer by Shira Kalfa

Not VerifiedOntario lawyer

My advice would be that you should not do this without the assistance of a tax practitioner whether that be a tax lawyer or accountant. First, you are not permitted to transfer a business without triggering tax consequences, unless you do so under s.85 of the Income Tax Act which allows for the tax neutral transfer of property. This is because the business has value, partly goodwill, which is taxable at its transfer. To answer your question directly, yes, reducing the revenue significantly can trip up the system and will flag the CRA to reach out to you to inquire as to why. If you do not have a s.85 rollover and T2057 form completed, you will have done this transfer incorrectly and you may face penalties in addition to tax.

To answer your question overall - the names of the corporations do not signify anything and this is not the issue. Quite simply, there is no way to transfer out a part of the business, regardless of the name of the newco, without either capturing tax or doing so under s.85 which will neutralize any tax consequences.

Posted 8 months ago

Shira Kalfa is a founding partner of Kalfa Law, a business & tax law firm in Toronto. As the lead solicitor at Kalfa Law, Shiras' practice is focused on:

Corporate law including incorporation, joint ventures, partnership agreements, shareholder agreements and corporate restructuring
• Commercial law including asset and share purchase and sale transactions, contract drafting and review and financing
Tax law & tax planning 
Learn more about Kalfa Law here
Call Shira at: 416-631-7227
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Please note that this is for informational purposes only and does not constitute legal advice to you. Legal advice pertaining to your particular situation can only be provided by a lawyer who has met with you to obtain all pertinent background information necessary to give you a formal legal opinion. For formal legal advice, hire a lawyer (many give a free first consultation). Contact Shira Kalfa, or search the Lawyer Directory.

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