Share Classes When You Incorporate in Canada: Spouse and TOSI

What share structure must the articles of incorporation set out?

The articles must list every class of shares the corporation may issue and any maximum number. One class is enough for a single owner: by law, its shares carry the right to vote, to receive declared dividends and to receive the remaining property when the corporation is dissolved (Canada Business Corporations Act, section 24). With two or more classes, the articles must spell out each class's rights, and each of those three rights must sit with at least one class (section 6 and section 24).

Corporations Canada's basic online incorporation uses ready-made articles with one or two classes of shares; a custom filing lets founders write their own share structure (Corporations Canada). A corporation formed under a provincial act follows that act: the building blocks are similar, but the documents differ; British Columbia, for example, sets out the classes in its notice of articles (BC Business Corporations Act, section 53).

The choice is simple when one person will own every share. It needs care before filing when a spouse, common-law partner or child will own shares, because two tax rules decide who pays tax on their dividends: tax on split income (TOSI) and attribution. Changing classes later takes a special resolution and articles of amendment, and moving shares between family members can be a taxable transfer.

Why do founders create several share classes at incorporation?

Several classes let the corporation treat owners differently: the articles can give one class votes and another none, and can let the directors declare a dividend on one class without the other (section 24). An unused class already in the articles can also be issued later, for example to a holding company, by a directors' resolution, provided its rights fit the plan (section 25).

Each extra class adds paperwork for as long as the corporation exists:

Adding a class after incorporation takes a special resolution of two-thirds of the votes cast and articles of amendment (section 173); a federal corporation pays $200 to file them online (Corporations Canada fees). For a holding company over the shares, see setting up a holding company.

Can my spouse be a shareholder with half the company from day one?

Yes. A spouse or common-law partner can subscribe for shares when the corporation is formed, like any other founder. A federal corporation can issue a share only once it is fully paid in money, property or past services worth at least what the corporation would have received in money; a promissory note from the spouse does not count (section 25).

The directors set the price. When every founder subscribes at the start, before the corporation owns anything, each can pay the same small amount per share. Spousal attribution does not reach shares the spouse pays for with money that is truly theirs, such as their own earnings; a bank record from their own account shows who paid. Money you give them for the shares brings attribution into play (next section). A spouse without savings can borrow from you instead: spousal attribution does not apply if the loan charges at least the CRA's prescribed rate in effect when it is made and the spouse pays each year's interest no later than 30 days after the year ends (section 74.5(2)). TOSI and corporate attribution (next section) are separate tests, and the interest your spouse pays you is your income.

For TOSI, the spouse does not need half: excluded shares need at least 10% of the votes and value (below). Half the voting shares gives the spouse half the votes at shareholder meetings, so a vote between you can tie. If you are moving an existing sole proprietorship into the corporation for shares, see moving a business into a corporation.

If I give my spouse the money for the shares, are the dividends taxed to me?

Generally yes, unless TOSI applies. Under spousal attribution, income from property you give your spouse, or from property bought with it, is taxed to you while you are resident in Canada and remain spouses or common-law partners (Income Tax Act, section 74.1). Shares bought with your gift are such property, so their dividends come back to you. If a dividend is taxed as split income instead, spousal attribution does not apply to it, and the spouse pays TOSI (section 74.5(13)).

A second rule, corporate attribution, applies when you transfer or lend property to the corporation itself, such as start-up cash, equipment or a business. If one main purpose is to lower your income and benefit your spouse, or a child under 18, who owns 10% or more of any class, you are deemed to receive interest at the CRA's prescribed rate (a rate set each quarter) on the amount outstanding. Interest actually paid to you, certain dividends you receive on shares taken for the transfer, and dividends taxed to the family member as split income reduce that amount (section 74.4). The rule covers transfers made "directly or indirectly", so money you give your spouse that they then put into the corporation can count too.

Corporate attribution does not apply for any period the corporation is a small business corporation: a Canadian-controlled private corporation whose assets, by fair market value, are all or substantially all used mainly in an active business carried on mainly in Canada, or are shares or debt of such connected corporations (subsection 248(1)). It can stop being one if profits pile up in investments or cash the business does not use, or if it loses Canadian-controlled status. From then on, the deemed interest can apply. A corporation set up mainly to earn rent, interest or other income from property, or one through which the owner works for a client who would otherwise be their employer (a personal services business), does not carry on an active business unless it has more than five full-time employees, so it is not a small business corporation and the deemed interest can apply from day one (subsection 125(7)).

Will my spouse's dividends be taxed at the top rate under TOSI?

They are when a relative works in or owns part of the business and no exclusion applies. Tax on split income charges the highest individual rate, 33% federally plus the province's top rate, on dividends a family member receives from a private corporation whose business a relative is actively engaged in on a regular basis, or in which a relative owns shares worth at least 10% of the value of all its shares (section 120.4). Salary is not split income (CRA guidance).

The exclusion a share structure can control is excluded shares. A spouse's shares qualify only if every condition holds:

The CRA describes the services test as revenue before expenses, with all of a corporation's businesses added together, and goods sold with a service not counted as services only when they are provided separately for the customer's use rather than being incidental to the service (CRA: excluded shares). A consulting, IT contracting or other service business usually fails it, whatever the class design.

Other exclusions do not depend on the share structure. A spouse who works in the business on a regular, continuous and substantial basis, in that year or in any five earlier years, is covered by the excluded-business rule; an average of at least 20 hours a week during the part of the year the business operates counts. A spouse's dividend is also excluded if the owner is 65 or older by year-end and the dividend would have been excluded in the owner's hands. A reasonable return for a shareholder 25 or older is a further, fact-based route (section 120.4). For how these work in practice, see paying family members.

Why does a non-voting "dividend class" for a spouse fail the excluded-shares test?

Non-voting shares give no votes, and the excluded-shares test needs at least 10% of the votes as well as of the value (section 120.4). A spouse who holds only a non-voting class therefore fails, however many shares they own, and their dividends are split income unless another exclusion applies.

A design that can pass gives the spouse, directly in their own name, shares carrying at least 10% of the votes and worth at least 10% of the value of all issued shares. The simplest version is the same voting class as the owner; a separate voting class with full rights can also pass. Value means fair market value, which depends on the rights each class carries, not on the number of shares. The test adds up all the shares the spouse owns, so a non-voting class can still qualify if the spouse also holds voting shares that bring the total to at least 10% of the votes and of the value. Shares held through a trust or holding company do not count; the CRA's test is shares owned directly (CRA: excluded shares). Even a passing design fails if the corporation is a service business or a professional corporation.

Can children under 18 or adult children own shares, and what does TOSI do to their dividends?

Children can hold shares, but TOSI treats them by age at the end of each year (section 120.4):

While a child is 24 or younger at year-end, someone else can also be made to pay the child's TOSI: a parent, if the child is under 18; from 18 to 24, the relative whose work in or ownership of the business made it a related business (Income Tax Act, subsection 160(1.2)). Amounts, safe-harbour returns and planning for children are covered in paying family members. A gift of shares or money to a child can also bring attribution or transfer rules; see transferring property to family.

Already incorporated with only my shares: can I add my spouse later?

Yes, in one of two ways. The corporation can issue new shares to the spouse, who pays for them; once the corporation has value, a price below that value moves value from your shares to theirs. Or you can give or sell existing shares; between spouses this generally happens at your cost, so no gain is taxed at the time, but later dividends (unless TOSI applies) and capital gains can be taxed to you under spousal attribution. If the needed class does not exist, the articles must be amended first. The tax on each route is covered in adding or removing an owner.

What records prove who owns which class from the start?

The corporation's own records prove ownership, so they should be complete from the first day. Federal law requires a securities register and directors' resolutions, among other records (sections 20 and 50):

For the full list, see the minute book for a new corporation. For recording share capital in the accounts, see books for a new CCPC.

Example

These examples are illustrative and use Canadian dollars. They apply the rules above and do not calculate the tax.

Ontario IT consultant and spouse at 50/50

An IT consultant and their 40-year-old spouse each subscribe for 50 common shares at C$1 a share. The spouse pays C$50 from their own earnings, so spousal attribution does not reach the shares. More than 90% of the corporation's income is from services, so the spouse's shares fail the excluded-shares test. The spouse's C$40,000 half of a C$80,000 dividend is split income, taxed at the top federal and Ontario rates, unless another exclusion applies: for example, the consultant is 65 or older by year-end, or the spouse works in the business an average of 20 hours a week.

British Columbia retail store

The owner subscribes for 700 Class A voting shares for C$700. The spouse, 40 and not working in the store, pays C$300 from their own savings for 300 Class A shares, so they hold 30% of the votes and 30% of the value. The store sells goods, so less than 90% of its income is from services. If its income is not from another business related to the spouse, the spouse's shares can be excluded shares, so the spouse's C$6,000 share of a C$20,000 dividend on Class A can be taxed at the spouse's own rates. Had the owner given the spouse the C$300, spousal attribution could tax that C$6,000 to the owner instead.

Alberta couple with a non-voting dividend class

The owner holds 100 Class A voting shares; the spouse holds 100 Class B non-voting shares meant for dividends. The spouse has no votes, so the shares fail the excluded-shares test, and dividends on Class B are split income unless another exclusion applies. At the first share issue, the corporation could also issue the spouse enough Class A shares to carry at least 10% of the votes and value; the services and other conditions still apply. Later, the same fix needs a new share issue or an amendment.

Different for you?

• You are about to file articles and want a spouse or child to own shares: class design, who pays and the services test are cheapest to settle before filing. Bring the ownership plan, ages and expected income mix for corporate tax help.
• Family members already hold shares and have received dividends: check whether each year's dividends were split income, and whether the classes need amending before the next dividend. Bring the articles, securities register, dividend resolutions and each family member's returns for corporate tax help.
• The corporation earns 90% or more of its gross business income from services: excluded shares will not help; see paying family members for the other exclusions and get corporate tax help before paying family dividends.
• The corporation will hold rental property or investments: corporate attribution can apply from the start; see rental property in a corporation and get corporate tax help before family members subscribe.
• A spouse or child who will own shares lives outside Canada: TOSI applies only to Canadian residents, but dividends paid to a non-resident face withholding tax, which the corporation must withhold or else pay itself (Income Tax Act, section 215), and non-resident owners can affect CCPC status; see non-resident owners of a Canadian corporation and CCPC status for a new corporation.
• You practise as an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor through a corporation: that is a professional corporation, so the excluded-shares route is unavailable and your profession's ownership rules apply; see professional corporations.
• The corporation already exists and you want to add or remove an owner: see adding or removing an owner.
• You are moving a sole proprietorship into the corporation: see moving a business into a corporation.
• You want a holding company to own the shares: see setting up a holding company.
• You have not decided whether to incorporate: see sole proprietorship or corporation.