Kitchen & bath renovator incorporation: what the shield covers

When incorporating a renovation business starts to pay

As a sole proprietor every dollar of renovation profit lands on your T1 through a T2125, at your marginal rate, whether you spent it or reinvested it in a second van. A corporation pays 12.2 percent on the first $500,000 of active business income in Ontario — 9 percent federal plus 3.2 percent provincial — and the difference stays in the company until you draw it. That deferral is worth the most to exactly the business a renovator runs: lumpy profit, constant reinvestment in showroom displays, vehicles, and tools, and a working-capital float that has to cover cabinet deposits before client draws arrive.

Liability is the other half of the case. A renovation firm holds deposits it has not yet earned, warrants tile and plumbing that will be tested daily for years, and sends crews into occupied homes where a dropped countertop or a flooded ceiling is a real claim. There is no revenue figure that flips the switch; our incorporation explainer covers the general test, and for renovators the practical trigger is usually the first showroom lease or the first year profit clearly exceeds what you need to live on.

What the corporation does not protect you from

New renovation corporations are often set up on the belief that everything now stops at the company. Four things do not.

• Construction Act trust money. Amounts a contractor receives on a job are held in trust for the subs and suppliers on that job, and a director or officer who assents to a breach of that trust is personally liable. Spending one client's deposit on another client's cabinets is the breach, incorporated or not.
• Unremitted HST and source deductions. Directors are personally assessable for HST the corporation collected and payroll deductions it withheld but did not send in — the two debts a struggling renovator is most tempted to borrow from.
• Personal guarantees. The showroom lease, the credit application with your cabinet manufacturer, the van financing, and the operating line will almost all be guaranteed personally in the early years.
• Licences and registrations. Municipal renovator licences where they exist — Toronto's building renovator licence, for example — and any electrical contractor licence are held by the entity. A new corporation applies fresh.

None of this argues against incorporating. It argues for running the corporation as if the deposits were never yours, which is also how the bookkeeping should already treat them.

Moving an existing renovation business into a corporation

Most renovators incorporate mid-stream, with open contracts, deposits in hand, and a van full of tools. The transfer needs to be deliberate, because a sale of business assets to your own corporation is a taxable disposition unless it is done under a section 85 rollover at cost. The section 85 explainer covers the election; the table below covers what actually moves.

Share structure gets decided at the same time. A spouse who runs the showroom or the books for twenty or more hours a week meets the excluded-business test under the tax on split income rules, which keeps future dividends to them out of TOSI; a spouse with no role in the business does not, and we plan accordingly. A holding company is rarely the first move for a renovator, but it becomes relevant once retained profit or a purchased showroom building needs to sit somewhere the operating risk cannot reach.

Year one in the corporation

The compliance rhythm is not heavy, but it is unforgiving of gaps. The minute book and the annual return through the Ontario Business Registry keep the corporation in good standing. The T2 is due six months after year-end with tax generally due earlier, HST is usually filed quarterly at your volume, and owner pay is decided between salary, which builds RRSP room and CPP, and dividends, which do not. Executive officers of construction corporations are covered by WSIB by default, and one officer who performs no construction work can generally apply for an exemption.

The one choice that saves renovators money every year afterward is the fiscal year-end. Pick a month when few jobs are half-finished — typically the winter lull rather than October — and the work-in-progress cut-off, the deposit reconciliation, and the year-end fee all shrink. If your supply chain includes US manufacturers, the renovator cross-border guide covers the import accounts the new corporation will need, and our incorporation and compliance page lists what the setup and the annual cycle include.

Source: Ontario — Construction Act (trust provisions and director liability).