How to structure your corporation in 2026 for maximum tax efficiency

Why corporate structure matters

Your corporate structure controls how profits are taxed, how capital flows between entities, and how risk is managed. The ITA distinguishes between active business income, which qualifies for lower small-business tax rates, and investment or passive income, which is taxed at higher rates. Structuring correctly ensures:

• Active income stays within the small business deduction (SBD) under section 125.

• Investments and real estate are isolated in a holding company (Holdco).

• Tax deferral and income splitting remain CRA-compliant.

Case reference: Canderel Ltd. v. Canada (1998 SCC 88) confirmed that businesses have flexibility in reporting and structuring so long as results accurately reflect income and align with the Act’s intent.

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Key corporate structures for 2026

1. Single-entity corporation (for independent professionals)

Best for new consultants, freelancers, or professionals (e.g., doctors, engineers, IT experts).

• Qualifies for SBD on the first $500,000 of active income under section 125.

• Allows income deferral at ~12–15% corporate tax versus 50%+ personal tax.

• Provides access to business deductions under section 18(1)(a).

Tip: keep separate business and personal bank accounts to satisfy CRA documentation rules.

2. Operating and holding company (Opco–Holdco)

Ideal for businesses with retained earnings or multiple assets.

• Opco conducts daily operations.

• Holdco owns Opco shares and receives tax-free intercorporate dividends under section 112(1).

Benefits:

• Asset protection—Holdco isolates profits from Opco’s liabilities.

• Tax deferral—earnings remain in Holdco taxed at low corporate rates until withdrawn.

• Succession planning—Holdco facilitates family transfers or estate freezes.

Case reference: Guilder News Co. (1963) Ltd. v. Canada (1973 SCC) validated corporate reorganizations designed to preserve capital and defer tax when executed properly.

3. Multi-entity or “family enterprise” structure

Used by high-net-worth families with multiple companies or income sources.

• Separate corporations for active business, real estate, and investments.

• Intercorporate loans and dividends managed under section 17 and section 112.

• Family trust owns Holdco shares to multiply the lifetime capital gains exemption (LCGE) (section 110.6).

Benefits:

• Streamlines intergenerational wealth transfer.

• Allows flexible distribution of income and dividends among family members.

• Qualifies multiple family members for LCGE on sale of shares.

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Advanced structuring strategies for 2026

1. Section 85(1) rollovers

When transferring assets into your new corporation, elect under section 85(1) to defer capital gains. This avoids immediate taxation while preserving cost-base flexibility.

2. Section 86 share exchanges

Exchange existing shares for preferred shares to lock in value and issue new growth shares to successors. This estate freeze reduces future taxable value and prepares for business transition.

3. Family trust ownership

Under sections 104 and 107, a trust can hold corporate shares and distribute income tax-efficiently to beneficiaries. Trusts provide both asset protection and flexibility for succession planning.

4. Section 125(5.1) passive income management

Passive investment income above $50,000 reduces the SBD limit. To preserve the deduction, move excess investments into a separate investment corporation or partnership.

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CRA compliance and risk management

• Document all shareholder loans and repayments (section 15(2)).

• Issue proper dividends or T4/T5 slips annually.

• Maintain resolutions and corporate minutes for all reorganizations.

• File elections (Form T2057 for section 85 rollovers) on time.

• Avoid using personal assets for corporate expenses without proper agreements.

Penalty alert: CRA may reclassify undeclared benefits or misused funds as income under section 15(1), with penalties and interest under sections 161 and 163.

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Real client experience

A Mackisen client with multiple rental and retail businesses consolidated under a Holdco–Opco structure. This allowed deferral of $450,000 in tax, full access to intercorporate dividends, and audit protection through improved documentation. Another consulting client used a section 85 rollover to incorporate assets from a sole proprietorship tax-free, saving $90,000 in immediate capital gains.

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Frequently asked questions

Q1. What is the best corporate structure for my business?

A1. It depends on income type, family situation, and long-term goals. Most start with a single-entity structure and evolve into an Opco–Holdco as profits grow.

Q2. Can I move my existing assets into a corporation without tax?

A2. Yes. A section 85(1) rollover defers capital gains if Form T2057 is filed with CRA.

Q3. Do I need a holding company for real estate?

A3. Yes, if you want to protect property from business liability or separate investment income from active income.

Q4. How do I pay myself—salary or dividends?

A4. Salary builds RRSP room and CPP benefits. Dividends avoid CPP and use the dividend tax credit system. A hybrid mix is usually optimal.

Q5. How can I stay CRA-compliant?

A5. Keep accurate books, record all resolutions, and ensure your accountant files elections and statements of intent for every restructuring.

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Authorship:
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Corporate Tax 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’s Corporate Structuring Handbook, legal business journals, and small-business tax directories, reinforcing Mackisen’s expertise in corporate tax efficiency and legal compliance.