Adding or Buying Out a Shareholder in Canada

Should a new owner buy existing shares or receive new shares?

An existing shareholder sells shares when the purchase price is meant for that person; the corporation issues new shares when the investment is meant for the business. Either route can change voting power, dividend rights and control. Corporations Canada describes both ways to become a shareholder.

Read the articles and shareholder agreement before setting the price. The articles set the authorized classes and rights; transfer restrictions or a right of first refusal may limit who can buy. A new class or changed class rights can require an articles amendment for a federal corporation. Provincial corporations must check their own statute and registry. Corporations Canada: share structure.

Record the approval, subscription or transfer agreement, payment, effective date and updated share register. A person may resign as a director but still own shares; the share transfer is a separate step. Corporations Canada treats shareholder, director and officer as distinct roles.

When someone buys in, who has a taxable share sale and how is it valued?

The owner who sells existing shares may report a capital gain or loss. The usual calculation is sale proceeds minus adjusted cost base and selling costs; compare the price with the fair market value of the specific shares and their rights. A Québec resident also reports the gain on their Québec return, generally on Schedule G. CRA: capital gains calculation; Revenu Québec: capital gains.

If the buyer and seller do not deal at arm's length and the price is below fair market value, the seller can be deemed to receive fair market value even without collecting it. An ordinary gift generally uses fair market value, subject to rollover rules. A bargain buyer does not automatically get that same higher cost base: the law expressly adjusts the buyer's cost for a gift or an above-market purchase, but not a below-market purchase. Document a supportable value before agreeing to family pricing. Income Tax Act, sections 69(1) and 73; CRA: transfers of property.

A new share issue does not itself sell the old owners' shares. Still, issuing valuable rights for too little can shift value between people, so establish the corporation's value, outstanding share classes, debts and the proposed rights before fixing a subscription price. Whether that shift causes another tax result depends on the actual arrangement. A seller of some or all qualified small business corporation shares may be eligible for a capital gains deduction; check this before choosing a sale or redemption. See Selling your business for the eligibility rules. CRA: Capital gains.

Can I give shares to my spouse without tax now, and who reports later income?

A Canadian resident can generally transfer capital shares to a Canadian-resident spouse or common-law partner at adjusted cost base, so the transfer itself usually produces no capital gain. This is a deferral: the spouse takes that cost base. The transferor can elect out of the rollover on the tax return for the transfer year, which instead brings fair market value into the tax calculation. Income Tax Act, section 73(1); CRA: transfers to a spouse.

The share certificate alone does not decide who reports later income. Dividends on transferred shares generally attribute to the transferor while the couple remains together and the transferor is resident in Canada. A later taxable capital gain can also attribute back. If they live apart because the relationship broke down, income attribution stops for that period; stopping gain attribution on a sale while separated requires a joint election. A sale for fair-market-value consideration can avoid attribution if the transferor elects out of the rollover. If the price is owed, the debt must carry sufficient interest, paid within 30 days after each tax year ends, including every earlier year. Income Tax Act, sections 74.1, 74.2 and 74.5. Family dividend rules are covered in Paying family members.

What tax applies if I give shares to an adult child for little or no payment?

Giving existing shares to an adult child generally makes the parent report a disposition at fair market value, even if no cash changes hands. A sale below fair market value to a child generally has the same deemed proceeds for the parent. For an ordinary gift, the child generally receives a fair-market-value cost; a bargain sale may leave the child with a lower cost than the amount on which the parent was taxed. Qualifying family farm or fishing corporation shares transferred directly to a child resident in Canada can have different proceeds and cost under the family-transfer rules. Income Tax Act, sections 69(1) and 73(4)–(4.1); CRA: gifts and below-market sales.

A spouse or child receiving shares for less than fair value can also become jointly liable for the giver's unpaid income tax and GST/HST from the transfer period or earlier, up to the unpaid debt or the value received less consideration. The CRA may assess this liability at any time under Income Tax Act section 160 and Excise Tax Act section 325. A qualifying transfer under a separation order or written agreement has an exception.

Do not treat a new issue to the child as the same transaction as a gift of the parent's existing shares. The corporation, not the parent, issues those shares; the price, class rights and resulting value shift need their own review. Later dividends to a child may face tax on split income rules; see Paying family members. A whole-business family succession belongs in Selling your business.

Should I buy a departing co-owner's shares or should the corporation redeem them?

If you buy the departing owner's shares, you pay the price and become the owner of those shares. If the corporation redeems them, corporate cash pays the owner and the shares are cancelled. For a federal corporation, redemption requires redeemable shares and compliance with their terms and payment limits. A purchase of other shares follows different rules. Check the articles and the incorporating jurisdiction's statute before choosing a company-funded exit. Canada Business Corporations Act, sections 34 and 36; Income Tax Act, section 84(3).

A shareholder agreement may dictate who has the right or duty to purchase and how the price is set. A director's resignation alone neither cancels shares nor settles a buyout. Corporations Canada: shareholder agreements.

What does the departing shareholder pay on a purchase versus a redemption?

On a direct sale to another individual, the departing owner generally calculates a capital gain from proceeds less adjusted cost base and selling costs. On a redemption by a Canadian-resident corporation, the payment above the shares' paid-up capital is generally a deemed dividend. Paid-up capital is a tax measure and can differ from what the owner paid. CRA: capital gains; CRA: deemed dividends.

The amount treated as a deemed dividend is excluded from the share's capital proceeds, so the shareholder must also calculate whether the remaining proceeds create a capital gain or loss. A resulting loss can face further restrictions. This is why a redemption cannot be priced or reported from share value alone. Income Tax Act, section 54, definition of proceeds of disposition; section 84(3). If the buyer is a related corporation, section 84.1 may turn proceeds into a dividend. A qualifying parent-to-child corporation sale can instead use the immediate or gradual intergenerational exception: the parent and adult child jointly file Form T2066 by the parent's return filing deadline for the sale year. If the seller receives buyer-corporation shares, a joint section 85 election on Form T2057 may defer a gain; file by the earlier party's return filing deadline for the transfer year. Section 84.1 still needs review. Get corporate tax help before signing.

If the departing owner is not resident in Canada, check treaty residence and the rules before paying. A deemed dividend on redemption may require Part XIII withholding, unless a treaty lowers it. The corporation remits by the 15th day of the next month and files NR4 slips and return by the last day of March after the calendar year. For a sale of taxable Canadian property that is not excluded or treaty-exempt, the seller can request a section 116 certificate on Form T2062 before closing or must notify the CRA within 10 days after the sale. For treaty-protected property, the buyer claiming the section 116 exception sends Form T2062C within 30 days after buying. Without a sufficient certificate or the statutory reasonable-inquiry exception, the buyer must remit 25% of the price or excess over the certificate limit within 30 days after the purchase month; the CRA can assess the buyer at any time. Late seller notice can trigger the greater of $100 or $25 per day, capped at $2,500. Canadian incorporation alone does not make shares taxable Canadian property. Income Tax Act, sections 116 and 162(7). CRA: NR4 withholding; CRA: section 116 procedures.

When does changing owners create a short T2 year or restrict old losses?

A new shareholder or departing director does not automatically cause a short corporate tax year. A person or group must acquire control for the acquisition-of-control year-end rule to apply; a change in Canadian-controlled private corporation status can separately create a deemed year-end. Related-party transfers have specific exceptions, so review the voting rights and relationships, not just a headcount. CRA: T2 guide, lines 063 to 066.

When control is acquired, the tax year generally ends immediately before the acquisition. The current T2 asks about acquisition of control at line 063 and its date at line 065; line 066 covers a separate Canadian-controlled private corporation status change. File the short-year T2 within six months of its end. A corporation required to file a Québec CO-17 also files it within six months of that year-end. Revenu Québec: CO-17; filing guide. The federal tax balance is generally due within 2 months of that date, or 3 months for eligible Canadian-controlled private corporations. CRA: balance-due day.

The corporation can elect on its short-year T2 to use the actual acquisition time instead of the default start of that day. If control changes within 7 days after its established year-end, with no intervening loss restriction event, it can also elect on that year's T2 to extend the year to the acquisition time. An authorized signing officer signs the return, due within six months of that year-end. Income Tax Act, sections 249(4)(b) and 256(9); CRA: T2 guide. A loss restriction event generally prevents old net capital losses from reducing later gains. Old business losses survive only within the Act's continuing-business and income limits. Review the loss schedules before setting the transaction date. Income Tax Act, section 111(4) and (5). For loss carryovers, see Business losses. For the small business rate effect, see How corporations are taxed.

Does changing owners require a new corporation, business number or GST/HST account?

A share transfer or issue leaves the corporation itself in place, so a new corporation, business number or GST/HST account is generally not required solely for a shareholder change. Update the share register, file any director or significant-control changes required by the incorporating jurisdiction, and update CRA information when its business or owner records change. The answer changes if the legal entity changes, such as on incorporation or some partnership changes. CRA: changes of owners, partners or directors; CRA: change of legal status.

For a federal corporation, an ordinary shareholder change does not itself require notifying Corporations Canada. But the corporation must update its individuals-with-significant-control register within 15 days of learning of a change and file changed significant-control information within 15 days of the register change. Significant control includes ownership or control of at least 25% of voting shares or share value, and can also arise without share ownership. A Québec-registered enterprise must report changed directors or ultimate beneficiaries to the Registraire des entreprises through a current updating declaration within 30 days. Québec registry obligations and corporate transparency. Other provincial corporations should check their own registry and disclosure rules. Corporations Canada: shareholders; individuals with significant control.

If a director also leaves a federal corporation, notify Corporations Canada within 15 days of the change and update CRA records. Provincial corporations must check their own notice deadline. Resignation does not erase a director's personal exposure for payroll withholding or GST/HST the corporation failed to remit while they served. Under Income Tax Act section 227.1 and Excise Tax Act section 323, collection conditions and a due-diligence defence apply; CRA action or assessment must start within two years after the person ceased to be a director. Québec also has director-remittance liability. Canada Business Corporations Act, section 113(1); CRA: change of owners and directors.

On its next T2, a private corporation reports shareholders holding at least 10% of its common or preferred shares: answer line 173 and attach Schedule 50. CRA: T2 return, page 2; Schedule 50.

If our business is a partnership, what happens to an exiting partner's income or loss?

An exiting partner can still be allocated partnership income or loss for the part of the fiscal period during which they were a partner. Each partner reports their share, even if it was credited to a capital account rather than paid in cash. A sale of the partnership interest also requires a separate proceeds and adjusted-cost-base calculation. CRA: reporting partnership income; CRA: T5013 guide, former partners.

An exiting general partner can also remain jointly liable for partnership GST/HST payable while they were a partner; Excise Tax Act subsection 272.1(5) includes former members and certain earlier or dissolution liabilities. A limited partner who was not also a general partner is excluded from that rule.

The partnership agreement and final income allocation matter. The former partner's share may be calculated only after the partnership fiscal period ends and can adjust the interest's cost base at exit. If that period ends in the former partner's next tax year, the income allocation may be reported a year after the gain or loss on the interest sale. If one of two partners leaves and the other continues alone, CRA treats the business as a sole proprietorship. In Québec, the partnership dissolves if no new partner joins within 120 days. Revenu Québec: partnership. Contact CRA about closing the partnership's accounts and setting up the remaining owner's accounts; do not assume the partnership's business number carries over. If at least two partners remain, tell CRA about the change. A partnership required to file a Québec TP-600-V also issues RL-15 slips. The usual filing deadline is March 31 after the fiscal period for all-individual partners, five months after it for all-corporate partners, or the earlier date for mixed partners. Revenu Québec: partnerships and income tax. CRA: T5013 guide; change of legal status; change of partners.

Example

Illustrative Canadian-dollar amounts only. Two Canadian tax residents own a corporation. One wants to exit and holds shares with an adjusted cost base of C$20,000 and paid-up capital of C$10,000. The agreed share value is C$100,000, with no selling costs.

If the other owner buys the shares for C$100,000, the seller's illustrative capital gain is C$80,000 before any applicable deduction or tax calculation. The corporation pays nothing. If instead the corporation redeems the shares for C$100,000, the illustrative deemed dividend is C$90,000. The remaining C$10,000 of capital proceeds is below the C$20,000 cost base; whether the resulting loss is usable needs a separate review. The two structures do not turn the same payment into the same kind of income. CRA: capital gains; CRA: deemed dividends; Income Tax Act, section 54.

Different for you?

• The entire business is being sold, including a family succession: see Selling your business.
• You are buying an existing company's shares or assets: see Buying an existing business.
• A spouse or child will receive dividends: see Paying family members.
• You are choosing a partnership or corporation for a new venture: see Partnership or corporation.
• A new shareholder may change the small business rate: see How corporations are taxed.
• The corporation has old losses, a buyout is funded with corporate cash, or shares are being gifted or sold within the family: gather the articles, shareholder agreement, share register, adjusted cost base and paid-up capital records, valuation, loss schedules and intended transaction date. Get corporate tax help before signing.