Bringing in a Business Partner: Tax Implications of Selling or Issuing New Shares — CPA Firm Near You, Montreal

Introduction

Bringing a new partner into your corporation is a major decision that affects ownership, tax obligations, valuation, control, and long-term strategy. Whether you sell existing shares or issue new shares, each method has very different tax consequences. A poorly structured partnership entry can trigger unexpected capital gains, dilution issues, shareholder loan problems, GST/QST errors, or even loss of access to the Small Business Deduction. This guide explains the tax implications of bringing a partner into a corporation and how a CPA near you in Montreal can help ensure compliance and optimize the structure.

Legal and Regulatory Framework

Under the Income Tax Act and the Quebec Taxation Act, a partner may be introduced into a corporation in two ways: selling existing shares (a secondary transaction) or issuing new shares (a primary transaction). A share sale by an existing shareholder may trigger capital gains, but corporate-level tax is generally unaffected. Issuing new shares increases the corporation’s paid-up capital and dilutes existing shareholders. Both methods require updated minute books, share registers, resolutions, and possibly amendments to share classes. CRA requires fair market value assessments to prevent shareholder benefits or improper pricing. GST/QST does not apply to share sales, but may apply to asset sales.

Key Court Decisions

Courts have ruled that undervalued share transfers between related parties result in deemed dividends or shareholder benefits. Judges confirmed that issuing shares at below fair market value can cause immediate taxable consequences. In several cases, courts denied access to the Lifetime Capital Gains Exemption (LCGE) because the corporation did not meet qualifying criteria after bringing in a partner. Courts emphasize that proper valuation and legal documentation are essential when altering ownership.

Why CRA and Revenu Québec Scrutinize Partner Admissions

Adding a partner affects corporate control, share structure, tax elections, and valuation. CRA examines whether shares were transferred at fair value, whether capital gains were reported properly, whether new shares dilute LCGE eligibility, and whether the transaction was used to circumvent TOSI, attribution rules, or tax planning requirements. Revenu Québec reviews minute books, valuation reports, resolutions, and the impact on active business asset tests. Incorrect structuring raises audit risk.

Selling Existing Shares vs Issuing New Shares

Selling existing shares

Shareholders receive proceeds and may trigger capital gains. Corporation receives no funds. LCGE may apply if shares qualify.

Issuing new shares

Corporation receives capital injection; existing shareholders are diluted. Must ensure share class structure allows new issuance.

Hybrid structures

Both methods can be combined depending on financing and tax goals.

Valuation Requirements

Any transfer or issuance requires fair market value analysis. Undervaluing shares creates deemed dividends or shareholder benefits. Overvaluing shares harms the buyer and may distort paid-up capital. A CPA provides valuation support to maintain compliance.

Tax Implications of Bringing in a Partner

Capital gains

Selling shareholders may realize gains, potentially eligible for LCGE.

Small Business Deduction

Adding passive assets or restructuring incorrectly may disqualify LCGE in the future or reduce SBD access.

Paid-up capital adjustments

Issuing new shares changes the corporation’s equity structure.

TOSI considerations

Income allocation to new partners must comply with Tax on Split Income rules if family members are involved.

Shareholder loans

Funds flowing between partners and corporation must be structured properly.

Documentation Requirements

Directors’ resolutions

Approving share issuance or transfer.

Share purchase agreements

Detailing terms, price, and conditions.

Updated share registers

Recording changes in ownership.

Share certificates

Issuing certificates to new shareholders.

Minute book updates

Recording approvals, valuations, and structural changes.

Mackisen Strategy

At Mackisen CPA Montreal, we structure partner admissions to ensure tax efficiency, compliance, and proper valuation. We prepare share issuance or sale documentation, update minute books, review share classes, calculate LCGE eligibility, ensure GST/QST compliance for related transactions, and integrate partner onboarding into long-term tax planning and corporate strategy.

Real Client Experience

A Montreal tech founder brought in an investor by issuing new shares but did not update share registers. CRA challenged the ownership structure. We reconstructed the minute book, validated valuations, and corrected the corporate filings. Another client sold shares to a partner without assessing LCGE eligibility, losing access to significant tax savings. We restructured the remaining ownership to preserve future eligibility.

Common Questions

Should I sell existing shares or issue new ones?

It depends on cash needs, LCGE planning, and control considerations.

Do I always need a valuation?

Yes, to avoid shareholder benefit issues.

Will I lose control if I bring in a partner?

Only if voting rights are transferred. Share classes can preserve control.

Is GST/QST charged on share sales?

No, but asset sales are taxable.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal structures partnership admissions that protect tax positions, maintain compliance, and support growth. We ensure valuations, documentation, and tax planning are handled correctly from day one.