•My client was running Shopify ecommerce business (clothing products) for many years it was not successful until 2020.
• Even though she incorporated n 2017 but she never opened corporate business bank account until October 2020, so, from 2017 until 2019 she was reporting the business losses on her T2125 and filed inactive (nil) corporate T2 tax returns for the years 2017-2019
Three questions please:
• Would you consider October 2020 (the date the corporation started using its corporate business account to received shopify deposits and pay it’s expenses ) as the official business start date? please share if you have different thoughts.
• If October 2020 is the Sole to corporation transfer date, Would you recommend to always have purchase sale agreement between the sole and corp? Note, it is cash business, there is no capital assets, no significant inventory only $2K, No Accounts receivables, and I think since the business was loss making until October 2020 one can argue that there was no good will.
• From Accountant perspective, when you are approached with such scenario, do you insist that the client go to lawyer and arrange the purchase sale agreement before you start? also the higher chartered business valuator to confirm the good will value? or is it acceptable that I record $2K opening inventory to the shareholder loans and continue preparing the 2020 T2 return (my engagement is to prepare and file the corporate tax return)
It is difficult, but not impossible, to operate a corporation without a bank account. The existence of a bank account, in and of itself, doesn’t determine the start of operations.
The sole proprietorship she was operating will overlap with the corporation for some time, and both must be considered active until everything is moved over or dealt with. It is the client’s decision to establish the date of “start of business operations” in the corporation, but is often limited by the fact that sales invoices start showing the new GST/HST number of the corporation instead of the GST/HST number for the proprietorship. Obviously the client has a bit more flexibility if she is not yet charging GST/HST.
A legal agreement makes sense only if there are assets for which legal title will transfer. As I was recently made aware, intangibles that have zero cost (i.e. Goodwill) may cause future legal and tax consequences if you don’t establish unequivocally who owns them. If you want to be sure that the corporation owns those assets and/or the rights that go along with them, get it in writing.
Personally, I don’t INSIST that clients go to a lawyer, but if the situation warrants it, I will RECOMMEND that they do. A business valuation is a good idea if the client is planning to sell to a third party, or if there is a large value attributed to intangibles that CRA may question, etc.
Don’t record credit balances to the shareholder loan unless you have evidence to back it up! It effectively generates a balance that can be paid to the shareholder tax free, and CRA will not accept an arbitrary inflation as such.