Corporate Tax Planning Strategies for Canadian Private Companies

Income Splitting

Income splitting involves distributing corporate income to family members in lower tax brackets. Common vehicles include:

• Prescribed rate loans: A shareholder loans money to a corporation at the CRA prescribed rate. The interest income is taxed in the family's lower bracket.
• Family trust dividends: A trust distributes dividends to family members including children and seniors in lower brackets.
• Capital gains allocation: Family members are made beneficiaries of capital gains events in their lower tax brackets.

Note: The income tax rules ( ITA 56(2) and 74.1-74.5) include attribution rules that can reallocate income back to the original shareholder if certain conditions are not met.

Estate Freezing

An estate freeze restructures a company's shareholdings so that future growth accrues to the next generation without triggering immediate capital gains tax. The typical structure:

• Shareholder exchanges common shares for fixed-class preferred shares (valued at current fair market value)
• Children/youngergeneration receive new common shares that capture future growth
• When the founder dies, only the fixed preferred shares are subject to estate taxation — the growth passed to children is frozen at current value

Corporate Repatriation: Dividend vs Salary

When a private corporation distributes profits to a shareholder, the choice between salary and dividends has different tax consequences:

• Salary: Deductible to the corporation, taxable to the recipient as employment income. Creates RRSP room and CPP benefits.
• Dividends: Not deductible to corporation, but may benefit from the dividend tax credit and CDA (for tax-free portions)
• Return of capital: From CDA — tax-free distribution to the shareholder

SSVC and Lifetime Capital Gains Exemption

The Safe Income Test (SIT) and Specified Future Income (SSVC) rules determine how much of a corporate surplus can be distributed as a capital gain (taxed at 50% inclusion rate) versus an ordinary dividend (fully taxable).

The Lifetime Capital Gains Exemption (LCGE) allows individuals to realize up to $1.25M in capital gains (2024) tax-free on qualified small business corporation shares. Structuring to ensure shares qualify is a key planning strategy for founders.

Internal links (related)

• Capital Dividend Account (CDA)
• Income Tax Expense Calculation
• Shareholder Loan Capitalization