Shareholder Agreements

A section 85 rollover is an election under the Income Tax Act that lets a taxpayer transfer eligible property to a Canadian corporation on a tax-deferred basis, rather than triggering an immediate capital gain. The transferor and corporation jointly elect an "elected amount" that sets the proceeds for the transferor and the cost for the corporation, typically deferring the accrued gain.

It is commonly used to incorporate a sole proprietorship, to transfer appreciated assets or shares into a holding company, and as a building block in estate freezes and other reorganizations. In exchange for the property, the transferor usually takes back shares (and sometimes a limited amount of non-share consideration).

The election is technical and timing-sensitive — it is made on Form T2057 by a deadline, and errors in the elected amount or the consideration can defeat the deferral or attract adverse consequences. Careful structuring and documentation are essential.

The Lifetime Capital Gains Exemption (LCGE) lets eligible individuals shelter a substantial amount of capital gain — into the millions of dollars and indexed over time — realized on the sale of qualified small business corporation (QSBC) shares, or qualified farm or fishing property. For many business owners it is the single most valuable relief available on a sale.

To use it on a share sale, the shares must meet the QSBC tests at the time of sale: broadly, the company must be a small business corporation using substantially all of its assets in an active business in Canada, the shares must have been held by the seller (or a related person) for the prior 24 months, and an asset-use test must be met throughout that period.

Many companies do not satisfy these tests by default, often because of excess investments or cash. Advance planning — sometimes called "purification" — can position a company so the shares qualify when a sale eventually happens, and the exemption can sometimes be multiplied across family members.

Generally only half of a qualifying meal or entertainment expense is deductible. If you take a client to dinner, you can claim the meal, but the deductible portion is 50%, and the expense has to be reasonable and connected to earning business income.

Meals and entertainment are a frequent audit target because they are so often over-claimed. To support the claim, keep the original receipt and a note of who the client was and the business purpose of the meal. If you cannot provide that context during an audit, the auditor can disallow the expense. Different rules can apply to meals while travelling for business.

An estate freeze is a tax-planning strategy that locks in the current value of an owner's interest in a business (or other appreciating asset) for tax purposes, so that any future appreciation accrues to the heirs or successors rather than the owner.

The owner typically exchanges their common shares for fixed-value preferred shares equal to the current fair market value of the business, and new common shares — which capture future growth — are issued to the next generation or a family trust. The owner's eventual deemed-disposition tax on death is then capped at the frozen value, and the owner can keep control by holding voting preferred shares.

It depends on your numbers and your tolerance for risk. A sole proprietorship is the quickest and least expensive structure to start and run: there is no separate tax return, and you simply report the business profit on your personal T1. The trade-offs are that all of the profit is taxed in your hands in the year it is earned, and there is no liability shield — if the business is sued, you are sued.

A corporation is a separate legal person. It can shield your personal assets from most business liabilities, and a qualifying Canadian-controlled private corporation pays a much lower rate on active business income up to $500,000 (roughly 12.2% in Ontario), which lets you leave surplus profit in the company on a tax-deferred basis. A useful rule of thumb: if your business reliably earns more than you need to live on, a corporation is often the sensible choice; if there is no surplus at month-end, the simplicity of a proprietorship may win.

A free consultation can help you weigh the structures against your actual situation before you commit.

An estate freeze is a reorganization that "freezes" the current value of a business owner's shares at today's value, so that future growth accrues to the next generation or to a family trust. The owner typically exchanges their common shares for fixed-value preferred shares (often using section 85 or section 86), and new common shares are issued to children or to a trust.

The purpose is usually succession and tax planning: it caps the owner's tax exposure on death at the frozen value, shifts future growth to the successors, and can multiply access to the Lifetime Capital Gains Exemption across family members where the structure qualifies. It can also support income-splitting where the tax-on-split-income rules permit.

An estate freeze is a significant, fact-specific reorganization that must be coordinated with corporate law, family circumstances, and the relevant anti-avoidance rules. It should be designed and documented carefully.

You can claim a share of your home's carrying costs equal to the share of your home used for business. If your home is 1,000 square feet and your office is a 110-square-foot room, you can claim 11%. A renter can claim that percentage of rent, heat, and power; an owner can claim that percentage of mortgage interest, property tax, heat, and power.

Home office claims are heavily audited because they are often estimated or inflated. Measure the actual space rather than eyeballing it, and do not include questionable items like gardening or pool maintenance. Because people move and later cannot show a former office, it is wise to document the office now — take photos, draw a floor plan, calculate the square footage, and keep the records in case the CRA ever asks.

The small business deduction reduces the corporate tax rate on active business income earned by a qualifying Canadian-controlled private corporation. It applies to active business income up to $500,000 a year and brings the effective rate down to roughly 12.2% in Ontario — well below the personal marginal rates that would apply if you earned the same income personally.

The saving is largely a deferral. If your corporation earns $100,000 after expenses and you only need to draw $66,000 to live on, you can leave the remaining $34,000 in the company taxed at the low corporate rate. The portion that would otherwise have gone immediately to the Canada Revenue Agency at your high personal rate instead stays in the corporation to reinvest. When the money is eventually paid out to you, it is taxed in your hands then — so the tax is deferred, not eliminated, but the deferred amount works for the business in the meantime.

"Surplus stripping" refers to arrangements that try to extract a corporation's retained earnings as lower-taxed capital gains rather than as higher-taxed dividends. Section 84.1 of the Income Tax Act is an anti-avoidance rule aimed at certain non-arm's-length share transfers that would otherwise convert dividends into capital gains, and it can recharacterize the result as a deemed dividend.

The rule frequently arises in family succession — for example, when a parent sells shares of the family company to a corporation owned by their children. Recent legislation created defined exceptions for genuine intergenerational business transfers that meet specific conditions, but those conditions are detailed and must be satisfied to obtain the relief.

Because the line between legitimate planning and offside surplus stripping is technical and shifting, transactions in this area should be structured with current rules and the general anti-avoidance rule firmly in mind.

Qualifying for the Lifetime Capital Gains Exemption on a share sale requires meeting the qualified small business corporation tests, and a common obstacle is having too many non-active assets — surplus cash, investments, or redundant real estate — on the company's books. "Purification" is planning that removes or repositions those assets so the active-business tests are satisfied.

Typical steps include paying out excess cash, moving passive investments to a separate holding company, and ensuring the company keeps substantially all of its assets in an active business in Canada. Because the tests look back over a 24-month period, this planning generally needs to be done well before a sale, not on its eve.

Where the structure permits, the exemption can sometimes be multiplied among family members through a family trust or direct shareholdings, subject to the tax-on-split-income rules. The earlier this is planned, the more options remain available.

A family trust holds property for the benefit of family members under the control of trustees. In tax and estate planning it serves several purposes: it can hold the growth shares in an estate freeze so future growth accrues outside the founder's estate, it can multiply access to the Lifetime Capital Gains Exemption among beneficiaries, and it can provide flexibility in how and when value reaches the next generation.

Trusts also have important limits and rules. The tax-on-split-income rules restrict income-splitting with certain family members, the 21-year deemed-disposition rule requires planning to avoid a tax hit at that anniversary, and attribution rules can apply where property is transferred to a spouse or minor children.

A trust is a powerful tool when it fits the family's goals, but it adds administration and must be set up and maintained correctly. Whether one is appropriate depends on the specific facts and objectives.

In practice, yes. It is fine to use one vehicle for both business and personal driving, but on audit you need to be able to separate the two, and a vehicle log is what auditors look for. Many businesses simply pick a percentage, and auditors know it is a guess — which makes the deduction easy to deny.

A log is simple: record each business trip with the date, destination, reason, and the starting and ending odometer readings, and take odometer readings at the start and end of the year. Divide business kilometres by total kilometres to get your business-use percentage, then claim that share of fuel, insurance, licensing, interest, leasing costs, and maintenance. With a log that adds up, an auditor will generally allow the expense.

To qualify for the exemption on the sale of Qualified Small Business Corporation shares, three tests must be met. First, the corporation must be a Canadian-controlled private corporation at the time of sale. Second, the asset-use tests must be satisfied: throughout the 24 months before the sale, more than half of the corporation's assets must have been used in an active business carried on primarily in Canada (the 50% test), and at the time of sale a substantial majority of its assets must be so used (the 90% test). Third, the shareholder must have held the shares for at least 24 months continuously before the sale.

If your corporation will have more than one shareholder, a unanimous shareholders' agreement is close to essential. It governs what the shareholders can and cannot do, provides dispute-resolution mechanisms, sets the votes needed for major decisions, and controls how shares can be transferred or pledged. It can also include provisions that force minority shareholders to sell alongside the majority in a takeover, or that let shareholders participate in a deal another shareholder is making.

The single most important thing about a shareholders' agreement is timing: negotiate and sign it while the business is new and the shareholders are still on good terms. It is far harder to agree on these rules after a dispute has already started. We can help prepare an agreement that fits your corporation.

When a shareholder of a private corporation dies, the same underlying value can be taxed more than once: first as a deemed disposition of the shares on death, and again when the corporation's value is later distributed to the estate or heirs. Post-mortem planning is designed to reduce or eliminate that potential double — or even triple — taxation.

Common techniques include the "pipeline" strategy and the subsection 164(6) loss carryback, each suited to different situations and each with its own conditions and timing. The subsection 164(6) approach, for instance, generally must be implemented within the estate's first taxation year.

Because the relief depends on acting within strict deadlines after death, executors and beneficiaries of private-company estates should obtain advice early — well before the first anniversary of death — to preserve the available options.

Yes, if it is done properly. Paying a reasonable salary to a spouse or children who genuinely work in the business shifts income from a higher tax bracket to a lower one and lowers the family's overall tax. If a child with no other income earns a modest wage, they may pay little or no tax on it.

Two conditions are essential. The wage must be reasonable under section 67 of the Income Tax Act — pay what you would pay a stranger for the same work — and the work must be real, with timesheets and a record of what was done. Anything beyond a reasonable salary for genuine work, such as sprinkling dividends to family, can trigger the tax-on-split-income (TOSI) rules, so get advice before going further.

A section 85 rollover lets a taxpayer transfer assets — such as real estate, equipment, or shares — to a corporation in exchange for shares without an immediate tax bill. It requires a joint election by the transferor and the corporation on Form T2057, and the elected amount must fall between the asset's cost base and its fair market value.

A section 86 reorganization, by contrast, is an exchange of all the shares of one class for shares of another class within the same corporation. It is the provision most often used to carry out an estate freeze, and it applies automatically when the conditions are met rather than requiring a joint election.

An estate freeze locks in the current value of a business owner's shares for tax purposes and shifts future growth to the next generation, usually through a family trust. The owner exchanges their growth-bearing common shares for fixed-value preferred shares equal to today's value, and new common shares are issued to children or a family trust to capture future appreciation.

The benefit is that the owner's capital gain on death is capped at today's value rather than the much larger future value, while the post-freeze growth accrues to the next generation outside the owner's estate. A freeze also sets up the family trust to multiply the lifetime capital gains exemption across several beneficiaries on a future sale. A freeze caps the tax rather than eliminating it, and it has to be structured and documented carefully, so it is planning to undertake with professional advice well before a sale or transition.

Yes. GST/HST you collect and the income tax, CPP, and EI you withhold from employees are "trust" amounts — money the business holds on the government's behalf. Unlike ordinary corporate taxes, unremitted trust amounts can pierce the corporate liability shield and be assessed against the directors personally, for up to two years after a person last served as a director.

There is a "due diligence" defence — a director who exercised the care a reasonable director would have exercised is not liable — but in practice the Canada Revenue Agency tends to apply a very demanding standard and treats directors almost as guarantors of the debt. Before a director is assessed, the corporation's own ability to pay must first be exhausted, and a director's assessment can be objected to and appealed to the Tax Court of Canada. If you have received a director's liability assessment, get advice promptly.

A corporation is a separate legal person, and active business income earned in a Canadian-controlled private corporation — up to the small business limit, currently $500,000 a year — is taxed at a much lower rate than the same income earned personally. If you do not need to draw all the profit out, the difference stays in the corporation.

The tax is not eliminated; it is deferred until the money is paid out to the shareholder and taxed in their hands. But deferral has real value. The money that would otherwise have gone to tax can be invested or used to grow the business in the meantime, and a dollar of tax paid years from now costs less, in real terms, than a dollar paid today.

Both are valid, and each has trade-offs. Salary puts you on the corporation's payroll: it triggers CPP, sometimes EI, and payroll administration, and it requires the corporation to withhold and remit your source deductions — but it generates RRSP room and is a deductible expense for the corporation. Dividends are paid out of after-tax corporate income and avoid payroll mechanics and CPP, but you must leave enough money in the company to pay its corporate tax at year-end.

A caution applies to both. If a corporation pays dividends while it has unpaid corporate taxes, the Canada Revenue Agency can assess the dividend recipients for that unpaid tax. And if you go on payroll but fail to remit source deductions, you can be assessed as a director. As a sole shareholder and director you can be assessed personally either way, so the corporation's own tax obligations should always be funded first. We can help you plan a mix that fits your situation.

An estate freeze caps the value of a business owner's shares at today's value so that future growth accrues to the next generation. The owner exchanges their common shares for fixed-value preferred shares, and the corporation issues new common shares — usually worth a nominal amount — to children or a family trust. Because the new shares start at nominal value, there is no taxable event when they are issued.

After the freeze, future growth accrues to the next generation's shares, and the tax on that growth is paid much later, when they eventually sell. Because of the time value of money, paying that tax decades from now is far cheaper in real terms than paying it on the owner's death. A freeze can attract CRA scrutiny, so a proper valuation — ideally by a certified business valuator — and a price-adjustment clause are commonly used.

Corporate-owned life insurance is a policy a corporation takes out on the life of a key individual, with the corporation paying the premiums and receiving the death benefit. It serves several purposes: providing a financial safety net for business continuity if a key person dies; funding buy-sell agreements so a deceased shareholder's interest can be purchased without straining the company; and, with a whole-life policy, accumulating cash value on a tax-deferred basis.

A further advantage is that, on the death of the insured, the death benefit received by the corporation (less the policy's adjusted cost basis) can be credited to the corporation's Capital Dividend Account and then distributed tax-free to shareholders.

Where possible, sellers usually prefer to sell shares rather than assets, because the Lifetime Capital Gains Exemption can shelter a gain on qualifying shares but not on a sale of assets. The complication is that buyers often prefer asset sales, which are cleaner and avoid inheriting the company's historical liabilities.

To use the exemption on a share sale, the shares generally have to meet the qualified small business corporation tests at the time of sale, which can require advance planning — sometimes called purification — to remove non-active assets such as excess cash. Because the structure drives the after-tax result, it is worth modelling both options well before a sale rather than after a deal is signed.

Crystallization means triggering a capital gain on paper — without an actual sale to a third party — so you can use your Lifetime Capital Gains Exemption now, before a possible increase in the asset's value or a change in the law reduces the amount available.

It is usually done by valuing the qualifying shares and electing (commonly under a subsection 85(1) rollover) to a deemed disposition at fair market value, then sheltering the resulting gain with the exemption. This resets the cost base of the shares to their current value, so less gain is taxable on an eventual sale, and it locks in today's exemption limit.

It can be. If your corporation provides services that an officer or employee of the client would normally perform, and you function much like one of the client's employees — same work, under their direction, without genuine independence — the Canada Revenue Agency can treat your corporation as a "personal services business." Where that designation applies, the corporation loses the small business deduction and most of its deductions are denied, which can dramatically increase the tax.

The agency looks at the substance of the relationship, not just the fact that you have a corporation: your financial risk, who controls how the work is done, who supplies the tools, and whether you could send a replacement. Workers in industries that encourage incorporation, such as trucking, are especially exposed. If you are concerned that you may be operating a personal services business, it is worth getting advice before an audit raises the issue.

There is no single right answer — it depends on your goals and your corporation. Because the Canadian system is built on integration, the headline tax on salary and dividends is roughly similar; the decision usually turns on the side-effects. Salary is deductible to the corporation, builds RRSP contribution room, and requires CPP contributions (and gives CPP entitlement). Dividends are paid from after-tax corporate profits, attract a lower personal rate through the dividend tax credit, avoid CPP, and create no RRSP room.

Salary tends to suit owners who want RRSP room, value CPP coverage, or need to reduce corporate income to manage the small-business-deduction limit. Dividends tend to suit owners who want to avoid the CPP cost, prefer flexible distributions, or value simpler administration. Most owner-managers use a deliberate blend rather than one route exclusively.

The right mix depends on your income, your retirement-savings plans, your CPP views, the corporation's dividend pools, and your family situation, so it is worth modelling each year as part of year-end planning.

Income splitting through a private corporation is still possible, but the tax-on-split-income (TOSI) rules introduced in 2018 sharply restricted it. TOSI applies the top marginal rate to "split income" — such as dividends — received by a related family member from a private corporation, unless a specific exclusion applies.

The exclusions are what make splitting work. The most important include the excluded-business exclusion for family members who work an average of at least 20 hours a week in the business (or did so in any five prior years), the excluded-shares exclusion for a shareholder aged 25 or older who owns at least 10% of the votes and value of a qualifying corporation, and the exclusions tied to a business owner reaching age 65 and their spouse. Where an exclusion applies, the family member is taxed at their own graduated rates; where none does, TOSI claws the benefit back.

Because the exclusions are technical and fact-specific, splitting has to be built deliberately around them rather than assumed. Getting the analysis right before paying dividends to family members is what keeps the planning onside.

A holding company (holdco) is a corporation that owns the shares of an operating company rather than carrying on the active business itself. Surplus cash earned in the operating company is moved up to the holdco as inter-corporate dividends, which are generally tax-free between connected Canadian corporations.

Owners use a holdco for several reasons at once. It moves retained earnings away from the operational risk and creditors of the active business, which is a form of creditor protection. It provides a separate place to hold passive investments. And it positions the group for a future sale, because a buyer typically wants a clean operating company without years of accumulated investments inside it — which can also help the operating-company shares qualify for the lifetime capital gains exemption.

The trade-offs are the extra compliance cost of a second corporation and the passive-investment-income rules, which can reduce access to the small-business deduction where passive income across the associated group climbs above defined thresholds. Whether a holdco fits depends on the size of the surplus, the risk profile of the business, and the plan for eventual sale or succession.

Most incorporations, sales, and reorganizations have tax consequences worth more than the legal fees. A tax-aware lawyer drafts the share structure, the rollover, and the agreement with the after-tax outcome in mind — not just the corporate-law mechanics.

Yes — most corporate engagements involve close coordination with the client's accountant for valuation, rollovers, T2057 filings, and post-closing compliance. We treat your accountant as part of the team.

Most matters — incorporations, shareholder agreements, share sales, simple reorganizations — are quoted on a fixed-fee basis after we understand scope. Complex transactions and litigation are typically billed hourly with a budget cap. We will beat any competing Canadian tax-lawyer quote by 20%.

Under a co-counsel arrangement, both professionals stay on the file. You continue to manage the financial statements, the returns, and the routine CRA correspondence; we handle the legal submissions, the strategy, and any Tax Court of Canada proceeding. The client experiences a coordinated team rather than a hand-off.

You can engage us two ways: refer the legal portion of a file to us (we engage your client under our retainer and coordinate with you), or retain us as counsel on behalf of your firm or client. In either structure, the engagement is scoped to the legal work and bounded — you are adding a capability to the file, not transferring it.

It depends on the province and on the class of shares. Provincial Colleges of Pharmacists regulate who may own and control a pharmacy. In most provinces, only licensed pharmacists may hold the voting shares of a pharmacy corporation, while non-pharmacist family members (a spouse, children, or a family trust) may hold non-voting shares. A will that leaves voting shares to a non-pharmacist can lead the College to refuse registration or suspend the Certificate of Accreditation until control is restored to a licensed pharmacist.

Quebec is stricter — only licensed pharmacists may own a pharmacy, and ownership must be direct rather than through a holding company, trust, or family members. Where no pharmacist heir exists, the usual approach is to authorize the executor to sell the shares to a qualified pharmacist purchaser. Confirm your province's rules before structuring your will.

In an asset sale, the buyer acquires individual assets — inventory, fixtures, and goodwill — rather than the corporation. The proceeds are generally treated as business income and recapture at the corporate level, the vendor cannot use the Lifetime Capital Gains Exemption (LCGE) on goodwill held in the corporation, and each licence, contract, and permit must be transferred individually.

In a share sale, the buyer acquires the shares of the Pharmacy Professional Corporation. If the corporation qualifies as a Qualified Small Business Corporation (QSBC), the vendor can claim the LCGE on the capital gain, and there is no need to re-register licences or contracts. A share sale generally produces a better after-tax result for the seller, which is why many pharmacists structure the corporation so a share sale is feasible. The right choice depends on the corporation's liabilities, its QSBC status, and the buyer's preferences.

There is no accountant-client privilege in Canadian tax law. Your file, your notes, and your candid communications about a client's position are generally producible to the CRA — and an accountant's working note can become the CRA's evidence.

Once a tax lawyer is engaged, confidential communications made for the purpose of obtaining legal advice are protected by solicitor-client privilege. That protection can extend to analysis prepared at the lawyer's direction for the legal advice. Privilege protects communications made after the lawyer is engaged, so the earlier a lawyer is involved on a sensitive file, the more of the analysis can stay inside the privileged channel.

The legal engagement is scoped to the legal work and quoted up front, so you and your client know what the legal portion will cost before it begins. Many disputes and disclosures are handled on a fixed fee; we tell you the basis of the fee at the outset.

Your own billing for the accounting and return work is unaffected — we do not bill your client for accounting services or insert ourselves into your relationship. The initial consultation is free, and it is available to you as the accountant, not only to the client.

To claim the Lifetime Capital Gains Exemption, a pharmacy corporation generally needs at least 90% of its assets used in an active business at the time of sale or death. If a life-insurance policy's cash surrender value is recorded as a passive investment inside the operating Pharmacy Professional Corporation, it can count as a non-active asset and jeopardize that QSBC status.

Holding the policy in a Holding Company instead keeps the operating corporation's assets "pure," lets the Holdco accumulate the cash value and invest surplus dividends, and segregates the insurance proceeds for family use or buy-sell obligations. On death, the death benefit (less the policy's adjusted cost basis) creates a Capital Dividend Account credit in the Holdco, allowing tax-free capital dividends to the estate or shareholders.

Purification is the process of removing or restructuring passive and investment assets — excess cash, marketable securities, non-business real estate — so that a corporation meets the Qualified Small Business Corporation (QSBC) tests and the shares qualify for the Lifetime Capital Gains Exemption. Common techniques include transferring excess cash and investments to a Holding Company, paying dividends or bonuses to reduce retained earnings, selling non-operating assets, and moving corporate-owned insurance to a Holdco.

Because two of the three QSBC tests look back over the 24 months before a sale or death, purification should begin at least 24 months ahead. Purification crammed into the final weeks before closing invites the CRA to treat it as part of the disposition and to challenge the holding-period test, so the earlier the corporation is cleaned up, the safer the exemption claim.

When a pharmacist dies owning corporation shares, the same value can be taxed twice: once as a capital gain on the deemed disposition of the shares at death, and again as a dividend when the corporation's retained earnings are later distributed to the estate or heirs.

A pipeline plan addresses the second layer. The estate incorporates a new corporation, transfers the deceased's shares to it under a section 85 rollover in exchange for a promissory note equal to fair-market value, then amalgamates or winds up the original corporation into the new one. Over time the new corporation repays the note from the retained earnings as a capital repayment rather than a taxable dividend. The CRA generally expects a reasonable delay (often around 12 months) before repayment to confirm the reorganization is bona fide. The result is that only the capital gain at death is taxed. An alternative, the subsection 164(6) loss carry-back, suits estates where the corporation will be wound up shortly after death.

Under section 167 of the Excise Tax Act, the sale of an entire business as a going concern can be relieved of GST/HST where both the buyer and the seller are registrants and the buyer continues to operate the business immediately. The election is made jointly on the prescribed CRA form and should be referenced in the purchase-and-sale agreement.

For a pharmacy sale, the election can remove a significant amount of tax from the transaction. It is worth confirming registrant status on both sides and including the election in the definitive agreement so it is not overlooked at closing.

The consequences can be severe. Every pharmacy must have a licensed pharmacist acting as Designated Manager, and at death the executor must promptly appoint a replacement and notify the provincial College within the deadline (often 30 days). If no licensed pharmacist is in place, the College can require the pharmacy to close, prescriptions transfer elsewhere, and goodwill erodes quickly.

On the tax side, the deemed disposition of the corporation's shares at death can trigger a large capital-gains liability, and if the corporation is not a Qualified Small Business Corporation on the date of death, the Lifetime Capital Gains Exemption may be lost. A will that grants the executor authority to operate the pharmacy, appoint a Designated Manager, and carry out post-mortem reorganizations — combined with advance purification and, where appropriate, an estate freeze and a family trust — preserves both the business value and continuity of patient care.