TaxCycle | Products | Pricing | Training | Documentation | Support | News

Revenues after incorporation date, collected thru personal bank

Thanks for sharing your thoughts and experience about below:

I have (freelancer) online account with UpWork website and used to provide bookkeeping and accounting services as sole proprietor and get paid from the freelancing website to my personal bank, so in 2019 I filed T1-T2125.

Starting Oct, 1st 2020, I incorporated my accounting firm, and took me until December 2020 to open corporate bank account.

My freelancing website account changed to business name around mid October.
and My freelancing website linked bank account changed to company bank around mid December.

For two months (October & November) I kept accepting jobs from UpWork (the freelancing website) and got paid through upwork to my personal bank account.

Am I required to include all jobs completed after the incorporation date (Oct 1st) as corporate revenue and credit payments received to “owner advances” account, since UpWork paid me to my personal bank? Can I consider them T2 revenue? even, the invoices issued From my personal name and remitted to my personal account during the time I didn’t have company bank account opened yet?

P.S. Note: “freelancing website/UpWork” sent invoices to clients issued From:

  1. my personal name (from Jan 2020 till mid of Oct 2020) and paid me to personal
  2. the corporation name (from mid of Oct 2020 ) & paid me to personal until mid Dec (opened company bank)
  3. the corporation name (from mid Dec 2020) and started paying me to company bank account

Since section 230 of the ITA applies to BOTH legal entities (enforced by the offence provisions of Section 238), I would suggest proper accounting books and records (and legal documents) be maintained separately and properly for both of the legal and tax entities.

You will need to properly consider the legal effects of your legal contracts of each legal entity.

The correct tax treatment should follow from following the above.

1 Like

If you were audited, the auditor would look at the law and your intention. If it can be shown that the entries made in your name were meant for the incorporation, than include these in the incorporation. This would allow a smaller income on your personal taxes.

1 Like

I would go, offering the income until oct in your personal return and after oct (i.e. after incorporation) in your T2, even though you received the payments in your personal name. Its as simple as that.

Or one could “simply” make up any numbers you like for both sets of books and records, and base both tax returns on something else entirely, and not at all on the books and records and legal documentation.

1 Like

Actually, from contractual agreement standpoint, all what UpWork offering is arbitrating a job description based on agreed rate/amount, there is nothing like formal proposal/contract that shows two legal parties names.

However, upon job completion & at payment time, UpWork will automatically issue an invoice showing:
From >>>my legal name (as either personal name of corporation name)
To>>>>> Client’s legal name ((as either individual or corporation name)

Appreciate that you raised the law/legal/intention points, I think absent a proposal/contract/quotation in place, I need to do the proper accounting based on the legal name shown on the invoice issued (FROM).
Regardless which bank payments eventually landed in. Invoice is the only persuasive legal supporting document to show the two parties.

Opening incorporation does not mean that you have to close your proprietorship side of the business. Because your incorporation side was not fully ready for the operation until Dec (bank account not settled), You can report all the income on 2125, as you mentioned that you invoiced and received in your personal account.

1 Like

Nope, I don’t think I buy that one.
At the very least, “Upwork”'s lawyers and CPA’s will be ensuring that there is a proper contractual basis for everything so that they can get paid.

Sounds like it could be a bit of flim-flam terminology around Placement agency work. There may well be certain situations where the client would have to issue a T4, deducing CPP premiums (but not EI). (Or sometimes T4A).

IMHO, questions about T2 appear to be premature at this time, as the issues of compliance with Section 230 are the immediate concern.

nope

theres a definite base for both the numbers

The answer is given in your question:

  1. my personal name (Jan 2020 till mid of Oct 2020) and paid me to personal
  2. the corporation name (from mid of Oct 2020 ) & paid me to personal until mid Dec (opened company bank)
  3. the corporation name (from mid Dec 2020) and started paying me to company bank account

Any income that was in the corporation name [#2 &#3] belongs in the corporation. It is irrelevant where the money was deposited. If you deposit the money in your personal bank account [#2] it should be recorded as a draw in your corporation.

1 Like

In my case, similar to you…

  • I incorporated in Nov, 2019.
  • Bank account was not approved until two weeks later. (You need a commercial account to pay certain corporate bills. Nor will the bank allow you to use a Personal Bank Account for a Corporation.)
  • CRA did not approve the efile permissions until Dec 15(?), 2019. (Until this was cleared, I did not operate the corporation as it would be a violation of the Efiler Terms to efile on behalf of another person.)
  • Registrar of Enterprise Quebec did not approve the incorporation until mid-Jan 2020.
  • Quebec did not approve the netfile permissions until the end of January 2020. I was unable to netfile Quebec returns until that time. Thankfully, had none.

The (T2125) business continued to Dec 18, 2019. The Corporation took over invoicing after that date. Any invoice issued under the business before that date and paid after that date unfortunately was deposited into the corporation (due to certain auto-deposit issues.) Accordingly, the T2125 had a journal Loan to Corporation DR/Accounts Receivable CR and the corporation had a journal of Bank Account DR/Shareholder Loan CR.

I also had to file an election under 85(1.1) to transfer the goodwill and continuing contracts to the corporation, which meant that I got one additional share, as required by the Act. I chose not to transfer the Accounts Receivable (which is the reason for the above interesting transaction,) nor the assets of the business. Instead, I have charged the corporation rent, with GST/HST applicable. The election has a specific deadline… you need to be VERY careful to file this timely. I also highly recommend that you file this for a minimum of your goodwill.

Business will continue for several years after incorporating, but will have much smaller income and expense. I will continue to hold a personal GST/HST number as it make sense for the corporation to pay the sales tax.

1 Like

You have left out the beginning of the sentence you quoted.
““freelancing website/UpWork” sent invoices to clients…”

Whist the anecdotal evidence of what a DIFFERENT business (Whose legal name is not even known, just referred to as “upwork”) may or may not be doing in its OWN books may be interesting, it is not directly relevant in and of itself to the subject two business entities, without knowledge of the contractual or agency relationships.

Neither the subject sole proprietor nor the director of the subject NewCorp has yet mentioned anything about entries in their OWN proper business books and records (based on the evidence of the actual source documentation) in order to comply with Section 230.

No meaningful tax treatment speculation can be arrived at by drawing conclusions out of thin air or on insufficient information, and thus tax treatment issues are premature.
.
.
This may be a good time to remind ourselves of another good reason to comply with section 230:

"S 238 (1) Every person who has…failed to comply with… any of sections 230 to 232 … is guilty of an offence and, in addition to any penalty otherwise provided, is liable on summary conviction to
(a) a fine of not less than $1,000 and not more than $25,000; or
(b) both the fine described in paragraph 238(1)(a) and imprisonment for a term not exceeding 12 months."

You’ve raised some very good points about missing information as a hindrance to drawing conclusions.

What was your formula or equation when calculating the goodwill amount?

Also, how did you value continuing contracts?

From a practical perspective, no one at CRA is likely to get overly bent out of shape and bring S230/238 into effect on a small, unintended timing effect. They just aren’t like that, obnoxious as they CAN be at times.

As well, if the amounts are not overly material, reporting them appropriately (and logically - 1 > personal, 2&3 > corporate) is unlikely to cause anyone great grievances. No harm, no foul.

It would appear that in this instance UpWork has issued invoices on behalf of either the individual or corp (as stated above)…and that is where the income should go, regardless of whether UpWork takes a fee, gets paid back a fee or otherwise. From a technical perspective, UpWork should have ensured that the deposits actually went to the appropriate bank account, but that is not something we can always control. I’ve had numerous (usually personal tax) clients write payments to “me” instead of my corp over the years in response to corporate invoices. The money was billed by the corp, goes into the corp bank account and is reported as such.

(On this subject and just to show CRA isn’t totally insane, I had a client who reported (on his own) self-employed income from his corporation for a number of years - technically incorrect, of course. At some point we caught his corp up to date and CRA called to ask “Why no T4s for him?” I explained that they had gotten well behind, and we brought them up to date, and if they wanted to they could reassess for the CPP, but given that the client had already paid both halves as s/e income, it would be a wash, with possibly some penalty and interest left over. They agreed and left it as was. I’m sure others here have similar stories.)

You know I have to respond to your post, SmallBizGuy… :slight_smile:

"From a practical perspective, no one at CRA is likely to get overly bent out of shape and bring S230/238 into effect "

^ I think I missed the section in the CPA code of ethics that says that CPAs should encourage clients to commit offences (eg failing to comply with S230) in all cases where the risk of being caught and prosecuted may be guessed to be low…
.

“on a small, unintended timing effect.”

^ Not sure what evidence on this thread permits a definitive conclusion
.

if the amounts are not overly material,”

^ Speculative - and assumes facts not in evidence…
.

"It would appear that in this instance UpWork has issued invoices on behalf of either the individual or corp "

^ Again, assumes facts implied, but not in evidence…
.

“From a technical perspective, UpWork should have ensured that the deposits actually went to the appropriate bank account,”

^ There will be various contracts in place, determining what should and should not, in law, happen, but none of that was published in this thread…
.
.
;
" I’ve had numerous (usually personal tax) clients write payments to “me” instead of my corp over the years in response to corporate invoices"

^ In cases where that has been observed to happen, I generally go with advising a (Bolded) statement near the “Total Due” amount on the invoice stating clearly (eg):
"PLEASE MAKE CHEQUES PAYABLE TO: 123 CORP INC "

@joe.justjoe1 That is why we reply in a rather general way - we are not lawyers. We are not charging and @daaboul_999 isn’t paying for advice. We are having a discussion based on experiences we may have had and sharing some thoughts. That is what he asked for.

Yes, and that would be EXACTLY like:
“I have a piece of string 48 inches long. I am wondering what to do if it was 37 inches long. Actually I don’t know how long my piece of string is, as there is no ruler here. Please everyone keep on chiming in and telling me what you do when you have different pieces of string lying around. Especially of some of them are made of cotton, and some of steel.”

All this reminds me of the story about the worst partnership possible is one formed by a lawyer and an accountant. The lawyer could see all the potential problems and worked to prevent them while the accountant kept accurate up to date records and could tell exactly where they were at…During all that time, opportunities went by and were never noticed or taken up.

2 Likes

@joe.justjoe1 I was pretty sure you were going to reply. However, really…I don’t think anyone is “encouraging” a client to ignore S230 (or other sections) of the ITA or to ignore what the exact nature of the contracts are. Were that the case, no one here could EVER answer a question, nor could we EVER advise clients unless we are fully conversant with every detail and nuance of every transaction performed by that client.

However - it is a far cry when considering (and I don’t know the amounts, but I’m going to speculate here) reasonably trivial amounts of a few thousand bucks being allocated to one spot or another. No one isn’t reporting income - it’s a question of “where” and THAT does not offend S230 or any other section of the ITA. It’s a question of fact and perspective. I’m sure if the amounts were significant and material, the OP would have so stated.

To me, what the OP asked for, and what this forum is about, in general, is looking for approaches. I’m sure the OP will do his diligence around the details.

As I’m sure you are well aware, tax is many shades of grey. Very little is black and white.

1 Like