The decisions you make before you incorporate will shape your tax situation for years to come. This guide walks through the key structural choices — share classes, year-end dates, family shares, TOSI, the Small Business Deduction, and more — in plain language, before you sign anything.
⚡ Quick Summary: Key Points at a Glance
- Share structure: Incorporate with six share classes from day one — it costs nothing extra and preserves maximum flexibility
- Year-end date: You have up to 53 weeks (371 days) after incorporation to choose — pick strategically, not by default
- Family shares: Issue shares to family members at the beginning when they have little or no value — waiting is expensive
- TOSI: Understand the rules before paying any dividends to family — the top marginal rate applies if you get it wrong
- Small Business Deduction: One of the most powerful tax tools available — protect it from the passive income grind
- RRSP vs. corporate investing: Not a one-size-fits-all answer; most business owners benefit from both
- Family trust: A powerful tool for the right situation — multiplies the LCGE and adds long-term flexibility
If you are thinking about incorporating your business, the decisions you make before you sign those articles of incorporation will shape your tax situation for years to come. Most business owners focus on getting clients and generating revenue — which is exactly right — but a few structural decisions made early, and made correctly, can save you tens of thousands of dollars over the life of your business.
If you have already incorporated without addressing some of these items, it is worth revisiting them with your lawyer sooner rather than later. Think of this post as your pre-incorporation checklist, written in plain language.
1 Share Structure: Build Flexibility In From Day One
When your lawyer incorporates your company, they will ask about share classes. The default is often a single class of common shares — simple, but limiting. I recommend incorporating with six classes of shares from the outset:
| Share Class | Voting Rights | Typical Use |
|---|---|---|
| Class A | Voting | Primary operating owner |
| Class B | Voting | Secondary owner or co-founder |
| Class C | Non-voting | Family member — active in business |
| Class D | Non-voting | Family member — passive |
| Class E | Preferred | Estate freeze / income splitting |
| Class F | Preferred | Future planning flexibility |
Setting up multiple share classes at incorporation costs nothing extra — your lawyer will add them to the articles for the same fee. Adding them later, after the company has value, requires a corporate reorganization that can cost $3,000–$8,000 in legal and accounting fees, and may trigger a valuation requirement.
Different share classes give you the ability to pay dividends selectively. You can pay a dividend to Class C shareholders without paying one to Class A shareholders, for example. This is the foundation of income splitting — but it only works if the share structure is in place.
2 Choosing Your Year-End Date
Your corporation's fiscal year-end can be any date you choose, as long as it falls within 53 weeks (371 days) of your incorporation date. Once set, it stays fixed unless you apply to the CRA to change it — which is possible but involves paperwork and a short tax year.
Avoid your busiest season. If you are a retailer or a contractor, a December 31 year-end means your accountant is asking for records right when you are at your busiest. Choosing a year-end in the spring or fall gives you breathing room to gather records and meet with your CPA when things are quieter. A restaurant owner, for example, might choose a February or March year-end to avoid the holiday rush.
3 Issuing Shares to Family Members
The single most important timing rule in corporate tax planning is to issue shares when they have no value.
At the moment of incorporation, your shares are worth essentially nothing — the company has no assets, no clients, no goodwill. This is the ideal time to issue shares to a spouse or adult children. The cost to them is nominal (often $1 per share), and there is no valuation required.
If you wait until the company has been operating for two or three years and has built up retained earnings or goodwill, a formal business valuation is required before shares can be transferred. That valuation can cost $5,000–$15,000, and the recipient may have to pay fair market value — which defeats the purpose.
- If you want a family member to participate in dividends but not have a vote in corporate decisions, issue them Class C or Class D shares (non-voting).
- If they are actively working in the business and you want them to have a voice, Class A or B shares are appropriate.
- Preferred shares (Class E/F) are used for more advanced planning such as estate freezes — a topic we will cover in a future post.
4 TOSI — Tax on Split Income: What You Need to Know
Since 2018, the CRA has significantly tightened the rules around paying dividends to family members. The Tax on Split Income (TOSI) rules apply the highest marginal tax rate — up to 53.5% in BC in 2025 — to dividends paid to family members who do not meet specific exemption criteria. This eliminates the tax benefit of income splitting if not done correctly.
| Situation | TOSI Applies? |
|---|---|
| Spouse who works 20+ hours/week in the business | Generally exempt |
| Adult child (18–24) who works 20+ hours/week | Exempt if hours documented |
| Adult family member (25+) who owns 10%+ of votes and value | Exempt (excluded shares test) |
| Non-working spouse receiving dividends | TOSI applies — taxed at top rate |
| Adult child with no active role | TOSI applies |
| Professional corporation (doctors, lawyers, accountants) | Excluded shares exemption does NOT apply |
Simply issuing shares to a family member is not enough. You need to either document their active involvement in the business, or ensure they meet the excluded shares test (age 25+, owning at least 10% of both votes and value, in a non-professional corporation). TOSI is a complex area and the rules have nuances that depend on your specific situation. A proactive conversation with your CPA before you pay any dividends is essential.
5 The Small Business Deduction — Protect It
The Small Business Deduction (SBD) is one of the most valuable tax tools available to a Canadian private corporation. It reduces the federal corporate tax rate on active business income from approximately 15% to 9%, and in BC the combined federal-provincial rate drops to roughly 11% on the first $500,000 of active business income (the "small business limit"). That is a significant saving — and it is worth protecting.
Two things that reduce or eliminate your SBD:
- Passive investment income. If your corporation earns more than $50,000 in passive investment income (interest, dividends, rental income) in a year, the small business limit is ground down by $5 for every $1 over the threshold. At $150,000 of passive income, the SBD is eliminated entirely. This is the "passive income grind" — and it is a real planning consideration if you are building up investments inside your corporation.
- Associated corporations. If you own multiple corporations that are associated with each other, they must share the $500,000 small business limit. This is a common trap for business owners who incorporate a holding company or a second operating company without planning for it.
6 Investing Inside the Corporation vs. Your RRSP
One of the most common questions I get from incorporated business owners is: "Should I invest through my corporation or contribute to my RRSP?" The honest answer is: it depends, and most business owners should do both.
| Factor | RRSP | Corporate Investment |
|---|---|---|
| Tax deduction on contribution | Yes — reduces personal income now | No — funds are already in the corp at low tax rate |
| Investment growth | Tax-deferred until withdrawal | Taxed annually as passive income |
| Passive income grind risk | None | Yes — over $50K/year erodes SBD |
| Creditor protection | Generally protected | Not protected without planning |
| Flexibility on withdrawal | Taxed as income on withdrawal | Can be paid as dividend or salary |
| Best for | High personal income years | Retaining earnings after SBD limit is reached |
If you are paying yourself a salary and have RRSP room, contributing to your RRSP first is usually the right move — the deduction is immediate and the growth is sheltered. Once RRSP room is maximized, retaining earnings in the corporation and investing there can make sense, but watch the passive income threshold carefully. We will cover this topic in depth in a future post.
7 Family Trusts — A Powerful Tool for the Right Situation
A family trust is a legal arrangement where a trustee holds assets for the benefit of a group of beneficiaries — typically your spouse, children, and potentially yourself. In a business context, a family trust often holds shares of your operating corporation.
- Income splitting flexibility. A trust can allocate income to any beneficiary in any amount each year, subject to TOSI rules. This gives you year-by-year flexibility that fixed share classes do not.
- Multiply the Lifetime Capital Gains Exemption (LCGE). If you sell your business, each beneficiary of the trust who is an individual can claim their own LCGE (currently $1.25M). A trust with four beneficiaries could shelter up to $5M in capital gains from tax — a significant planning opportunity.
- Asset protection. Assets held in a trust are generally not owned by any individual, which can provide protection from personal creditors.
- Estate planning. A trust can facilitate the transfer of business value to the next generation without triggering an immediate tax event.
8 A Few Other Things Worth Knowing Early
Shareholder loans: The CRA monitors loans between you and your corporation closely. If you borrow money from your corporation, it must generally be repaid within one year of the corporation's fiscal year-end, or it will be included in your personal income. Keep your personal and corporate finances clearly separated.
GST/HST registration: If your revenues will exceed $30,000 in any 12-month period, you are required to register for GST. Many new businesses register immediately to claim input tax credits on start-up expenses — which is often the right move.
Payroll: If you plan to pay yourself a salary (rather than dividends only), you will need a payroll account with the CRA. Payroll remittances are due regularly and the penalties for late remittances are steep. Set up a system early.
Record-keeping: The CRA requires you to keep business records for a minimum of six years. Digital record-keeping using cloud accounting software (QuickBooks Online, Xero, or similar) from day one makes this straightforward and gives you real-time visibility into your finances.
The Bottom Line
The structural decisions you make in the first few months will follow your business for its entire life. The good news is that most of these decisions are straightforward when you know what to look for, and getting them right from the start is far less expensive than correcting them later.
Several of the topics above — family trusts, the LCGE, passive income planning, and RRSP vs. corporate investing — deserve their own dedicated posts, and I will be covering each of them in the Insights section over the coming months.
If you are considering incorporation, I would encourage you to book a consultation before you make any decisions about share structure, year-end, or compensation. A one-hour conversation at the beginning can save years of complexity later.
This report does not constitute a formal tax opinion, and no professional-client engagement is created solely by the receipt of this document. The application of tax law is highly fact-specific, and the Canada Revenue Agency’s interpretation of the Income Tax Act may differ from the positions described herein. Tax legislation, CRA administrative policies, and judicial interpretations are subject to change without notice, and such changes may affect the conclusions reached in this report.
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