Business Start-Up Planning

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.

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.

"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.

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.

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.

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.