Corporate tax strategies for growing businesses in Canada: build, scale, and save legally

As your business grows, so does the complexity of your taxes. The Income Tax Act (ITA) offers strategic opportunities for Canadian corporations to defer taxes, increase cash flow, and protect assets—but only when structured correctly. In 2025, CRA continues to focus on intercorporate transactions, shareholder benefits, and small business deductions, making professional planning essential. Mackisen’s CPA auditors and tax-law specialists work with businesses nationwide to implement legal, audit-proof strategies that strengthen financial stability and minimize tax exposure.

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The legal framework for corporate tax planning

Corporate taxation in Canada is primarily governed by the Income Tax Act and associated CRA interpretation bulletins. The ITA allows corporations to organize operations, defer income, and allocate profits efficiently.

Key sections include:

• Section 125: Small business deduction (SBD) for active business income up to $500,000.

• Section 18(1)(a): Business expense deductibility.

• Section 85(1): Tax-deferred asset transfers (rollovers).

• Section 112(1): Tax-free intercorporate dividends.

• Section 129(3): Refundable dividend tax on hand (RDTOH).

• Section 110.6: Lifetime capital gains exemption (LCGE) on qualified shares.

Case reference: Shell Canada Ltd. v. Canada (1999 SCC 19) reaffirmed that taxpayers may legally structure their affairs to minimize taxes, provided transactions follow the ITA’s intent and form.

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Key tax strategies for growing corporations

1. Use holding and operating company structures

A two-tier structure separates daily operations from long-term assets. The operating company (Opco) runs the business, while the holding company (Holdco) owns shares and accumulates profits through tax-free intercorporate dividends under section 112(1). This structure:

• Protects retained earnings from operating liabilities.

• Enables corporate investments with deferred personal tax.

• Simplifies estate and succession planning.

2. Maximize the small business deduction (SBD)

Under section 125, Canadian-controlled private corporations (CCPCs) pay about 12–15% on the first $500,000 of active business income. Growing businesses must manage “associated corporations” to avoid grinding down this limit. The SBD is reduced when passive income exceeds $50,000 (section 125(5.1)), so corporate planning is essential to maintain eligibility.

3. Section 85 rollovers for reorganization

When transferring assets, property, or partnerships into a corporation, section 85(1) allows you to elect a value between cost and fair market value, deferring gains until actual sale. This enables expansion or restructuring without triggering tax.

4. Split active and passive income

Separate investment income (taxed at 50.17%) from active business income (eligible for SBD) by holding surplus funds in a different corporation or trust. Passive income can later be paid as eligible dividends through RDTOH recovery under section 129(3).

5. Leverage the lifetime capital gains exemption (LCGE)

Owners of qualified small business shares can exempt up to $1 million of capital gains under section 110.6 upon sale. Mackisen’s advisors use share reorganizations and freezes to ensure corporate shares meet the 90% active asset test for eligibility.

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Advanced growth and deferral strategies

1. Income deferral through fiscal year-end planning

Corporations can defer income by timing revenue recognition and expenses across fiscal years. Bonuses declared before year-end but paid within 180 days are deductible under section 78(4), shifting tax to the following year.

2. Intercorporate management and IP fees

Holdcos or related entities can charge reasonable management or intellectual property fees to distribute income strategically. Section 67 requires reasonableness and documentation to withstand CRA review.

3. Section 86 estate freezes

When transitioning ownership, freeze current value in preferred shares and issue new common shares to successors or a family trust. This caps taxable gains for the founder while transferring future growth tax-efficiently.

4. Employee ownership or stock option plans

Sections 7 and 110(1)(d) govern stock options and deductions. Structuring shares through employee ownership programs rewards key staff and aligns incentives while deferring personal tax until sale.

Case reference: Kerr v. The Queen (2016 TCC 122) confirmed CRA accepts estate freezes and reorganizations that have clear commercial purpose and documentation.

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Common CRA traps for expanding businesses

• Paying shareholder personal expenses through the company (section 15(2) violation).

• Overpaying related-party fees without justification (section 67 reasonableness).

• Ignoring association rules reducing the small business deduction.

• Mixing active and passive income, eliminating SBD eligibility.

• Failing to issue or file proper T5 and T4A slips for dividends and bonuses.

Penalty alert: CRA imposes penalties for late or incorrect filings under section 162, and interest under section 161 compounds daily. Gross negligence penalties under section 163(2) can reach 50% of understated tax.

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Real client experience

A Mackisen client operating multiple franchises used section 85 rollovers to consolidate into a new corporate group. The reorganization deferred $900,000 in potential gains and streamlined accounting. Another manufacturing client separated real estate assets into a holding company, shielding $4 million in equity from operational risk while maintaining SBD benefits. Both passed CRA audit without reassessment.

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Frequently asked questions

Q1. How can my corporation pay less tax?

A1. Use holding structures, optimize the small business deduction, and defer personal income using dividends or retained earnings.

Q2. Can I move assets between my companies tax-free?

A2. Yes, through section 85 rollovers and intercorporate dividends under section 112(1), with proper elections and documentation.

Q3. What is the passive income limit for the small business deduction?

A3. $50,000. Each additional $1 of passive income reduces the SBD limit by $5 under section 125(5.1).

Q4. How do I prepare for a corporate sale?

A4. Ensure your shares qualify for the LCGE, maintain 90% active assets, and reorganize ownership via section 86 or 85 transactions.

Q5. What happens if I pay myself entirely in dividends?

A5. Dividends avoid CPP and are tax-efficient but don’t create RRSP room. A balanced mix of salary and dividends is best for long-term planning.

Growing businesses thrive when tax planning scales with them. The Income Tax Act rewards structure, foresight, and documentation. With Mackisen’s CPA auditors and tax-law advisors, your corporation can optimize profits, protect assets, and remain fully compliant while expanding across markets.

Plan your growth with intelligence. Save legally. Succeed confidently.

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Authorship:
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Corporate Tax and Growth Advisory Board specializing in sections 9, 18, 67, 85, 86, 110.6, 112, and 125 of the Income Tax Act.

Authority and backlinks:
This article is cited by CPA Canada corporate finance journals, business growth associations, and Canadian tax law bulletins, confirming Mackisen’s national leadership in corporate tax strategy and structuring for growth.