Introduction

Leaving a law firm to establish an independent practice — or to join a boutique partnership — is a common career transition for Ontario lawyers at various stages. From a tax perspective, the transition involves a change in how income is earned and reported, a set of setup decisions that affect all subsequent years, and a timing question around how income from the old firm and the new practice is treated.

Scenario: Nizhoni Leaves a Mid-Size Firm After Eight Years

Nizhoni is a litigation associate at a mid-size Toronto firm. She has been an employee for eight years — receiving a T4 salary of $185,000, with source deductions remitted by the firm, and annual RRSP room of approximately $29,000 based on her prior year's earnings. In September 2026 she resigns and begins her own sole practice.

The Transition Year Income Picture

From January to September, Nizhoni is an employee. She receives employment income, has source deductions withheld, and her entitlement to certain employment deductions (section 8 expenses) is the same as any salaried lawyer.

From October to December, she is self-employed (or, if she incorporates, operating through her new professional corporation). She earns professional income on her own files — with no employer withholding, no CPP employer contribution from a firm, and access to the full range of business expense deductions.

Key transition year issue: In the self-employment period, Nizhoni owes income tax and CPP on her professional income — but nothing has been withheld. If she earns $60,000 in the October to December period, that income plus her $185,000 employment income creates a total income of $245,000 — with significant personal tax owing at April 30. Without planning, this can create a cash shortfall.

Fix: Estimate the self-employment income in the final quarter and set aside a tax reserve — both for the April 30 balance due and for the instalment requirements that will begin in 2027 based on 2026's significant balance owing.

The Incorporation Decision

Should Nizhoni incorporate immediately on leaving the firm, or operate as a sole practitioner initially?

Operating as a sole practitioner first — before incorporating — has the advantage of simplicity in a period that is already operationally intense. For the first six to twelve months, the administrative overhead of incorporation (corporate accounts, payroll, T2 filing, minute book) may distract from the priority of building the practice.

On the other hand, incorporating immediately means any income earned through the new practice is corporate income from the first file — creating the deferral benefit from the start.

The decision depends on how quickly the practice will generate significant income. For a lawyer confident of generating $200,000+ in year one, incorporation from day one is worth the setup overhead. For a lawyer expecting a slow build, sole proprietorship in year one with incorporation in year two is reasonable.

Client Files and WIP from the Old Firm

In transitioning from the firm, Nizhoni may be entitled to a portion of the work in progress (WIP) on files she was lead counsel on — depending on the firm's policy and her departure agreement. The income recognition of WIP is the old firm's obligation during her employment period; post-departure file completions are her professional income.

The transition of specific client files also raises LSO professional responsibility questions (client consent, transfer of documentation) that are entirely separate from the tax treatment — but must be resolved before the file economics can be considered.

Setting Up for Year Two

Once the transition year is complete, Nizhoni's practice — whether sole proprietor or incorporated — is operating on a normal annual cycle. The key year-two actions:

Establish quarterly instalment payments for the year's estimated income.

Ensure the professional corporation's HST account is registered and filing quarterly.

Set up the compensation decision structure for the incorporated year (salary vs. dividend, RRSP funding, year-end planning).

Review the LSO annual fee and LawPRO premium deductibility — personal if sole proprietor, corporate if incorporated.

When to Speak With a CPA

Ideally, Nizhoni has a CPA conversation in August or September — before the departure — to model the transition year tax position and ensure the post-departure setup (bank accounts, HST registration, corporate structure if applicable) is in place before the first independent file is opened.

Rotaru CPA works with lawyers through firm departures, independent practice setup, and ongoing professional corporation compliance. Book a consultation to plan your transition.