Introduction

Many architects and interior designers incorporate after several successful years as sole proprietors — bringing with them accounting habits that worked on a T2125 but create problems in a corporate context. The five errors below are the ones that show up most consistently in the first two to three years after incorporation.

Mistake 1: Not Separating Personal and Studio Expenses at All

The sole proprietor architect was accustomed to running everything through one bank account and sorting it out at year end. The studio equipment, the software subscriptions, the client entertainment — all on one credit card, all reconciled in March.

Inside a corporation, the same approach creates shareholder benefit exposure. Personal expenses on the corporate credit card are section 15(1) benefits. At year end, the bookkeeper reconstructing which expenses were personal and which were corporate is doing costly retroactive work — and the shareholder benefit assessment risk is real.

The fix is the same as for other professions: a separate corporate bank account and corporate credit card, used exclusively for business expenses from day one of incorporation.

Mistake 2: Treating Project Retainers as Revenue When Received

An architecture firm invoices a $25,000 retainer at project commencement. The bookkeeper records it as revenue when the cheque arrives. The firm files the T2 with $25,000 of income from this project in year one — even though no services have been performed yet.

Under the percentage-of-completion revenue recognition approach applicable to long-term service contracts, the retainer is not fully earned until the services it covers are performed. Recording it as immediate revenue overstates year-one income and understates year-two or year-three income when the services are actually delivered.

The result is paying more corporate tax in year one than necessary, with the tax benefit of the timing difference lost.

Mistake 3: Expensing Capital Equipment Instead of Claiming CCA

An architect buys a $12,000 drafting station and computer setup in year one and books it as an office expense — expensing the full amount. For a sole proprietor, this may have been acceptable under certain simplified approaches. For a corporation under the ITA, capital property must be capitalised and depreciated through the capital cost allowance (CCA) system.

Expensing capital property in one year on a T2 will be challenged on audit. CCA classes exist for a reason — Class 10 for general computer equipment, Class 8 for furniture and fixtures — and the write-off schedule is prescribed, not discretionary.

The practical issue: the CRA may also have disallowed this on the sole proprietor T2125 in prior years, but the smaller scale meant lower audit risk. On a corporate T2 with larger equipment values, the error is more visible.

Mistake 4: Not Registering for HST at the Right Time

As discussed in Article 32 (Do architects and designers need to charge HST on all their services?), architecture fees are taxable supplies. The small supplier threshold is $30,000 of annual taxable revenue. Most incorporated architecture firms exceed this in their first year of operation.

The error: incorporating in January, starting to bill clients in February, exceeding $30,000 in taxable revenue by April, and not registering for HST until July. From the date the threshold was exceeded through the date of registration, the firm was required to be charging and remitting HST. The CRA may assess unremitted HST for that period, with interest.

Mistake 5: Not Understanding the Subcontractor vs. Employee Line for Freelance Designers

Many architecture firms engage freelance designers, drafters, and CAD technicians as subcontractors rather than employees — avoiding the payroll setup overhead. For a firm that engages the same person 20 hours per week, using the firm's software and direction, on all of the firm's projects, for two years running, the contractor characterisation is unlikely to survive an audit review.

As discussed in Article 47 (in the tech context, but equally applicable here), the misclassification of long-term embedded workers as contractors creates retroactive payroll liability, penalties, and the additional cost of EI and CPP that should have been remitted throughout.

When to Speak With a CPA

Architecture and design firms in their first two years of incorporation benefit from a compliance setup review — not just T2 preparation, but a review of revenue recognition, capital equipment classification, HST registration, and worker classification. These structural decisions are far easier to set correctly at incorporation than to correct on audit.

Rotaru CPA works with architecture and design firms on incorporation setup, revenue recognition, and annual corporate compliance. Book a consultation to start your corporate practice on the right foundation.