ARCHIVED - Business Transactions Prior to Incorporation
DATE: August 11, 1980
SUBJECT: INCOME TAX ACT
Business Transactions Prior to Incorporation
REFERENCE: Subsection 9(1)
1. Where a business is commenced or purchased by persons with the intention that it will be carried on by a corporation, it often happens that the commencement or the purchase of the business, and related transactions including transactions prior to the commencement of business, occur before the actual date of incorporation. Because the corporation does not exist in law before the date of incorporation, transactions occurring before the incorporation date can not, legally, be accounted for by the corporation except as discussed in 2 below.
2. The Canada Business Corporations Act (and certain provincial Corporations Acts, including those of Ontario, Manitoba and Saskatchewan) provide that a corporation may, within a reasonable time after it comes into existence, adopt any written contract made in its name or on its behalf before it comes into existence. Upon such adoption, the corporation is bound by the contract and is entitled to the benefits thereof as if it had been in existence at the date of the contract and had been a party thereto. The person who entered into the contract on the corporation's behalf (the promoter) ceases to be bound by the contract or entitled to the benefits thereof, unless a party to the contract successfully applies to a court for an order fixing obligations or liability under the contract to the promoter. A corporation subject to this legislation should commence to account for transactions under such a contract from the time at which the contract is adopted by it and should in that year account for any benefits or costs arising from the contract prior to that time. Any benefits previously received by the promoter should be recovered by the corporation, and any costs incurred by the promoter should be reimbursed.
3. In respect of the other jurisdictions, which have not enacted legislation similar to that described in 2 above, the Department will normally accept the accounting for pre-incorporation transactions by a newly formed corporation if the following conditions are met:
(a) The facts clearly indicate that it is the intention of those persons who authorize the transactions in the situations described above that the business will be carried on by a corporation. This will usually be so where application for incorporation is made before or at the time the business is commenced or purchased.
(b) The period of time between the commencement or purchase date and the incorporation date is relatively short or, if not, the delay is not due to any action taken or not taken by the parties involved.
(c) There is no dispute between the persons authorizing the transactions and the newly formed corporation as to who will account for the transactions.
(d) The effect on the combined tax liabilities of the parties involved is negligible, and
(e) The corporation adopts any written contract made in its name or on its behalf before it came into existence in respect of the pre-incorporation transactions it is accounting for.
4. The comments in IT-364 will apply to expenditures incurred prior to the commencement of business where the Department accepts the accounting by the newly formed corporation for pre-incorporation transactions.
5. Notwithstanding the comments in 3 above, the Department will not accept the accounting for pre-incorporation transactions in the corporation where the proprietor or the partners of an existing business incorporate, except where they incorporate a newly acquired business.
6. Taxpayers should not assume that the Department will automatically accept pre-incorporation transactions carried out in the circumstances described in 3 above as being transactions of the newly formed corporation. That determination can only be made after all the facts are known and after all of the relevant returns have been filed and examined.
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