Bringing on a partner: shares, price and paper

There are two ways a new partner ends up on your share register, and they send the money to opposite places. The corporation can issue new shares: the money lands in the business, every existing percentage shrinks proportionally, and you personally have no tax event. Or you sell part of what you already own: the money lands in your account, and you have a disposition at fair market value with a capital gain attached. Same 25%, two different transactions — and the number you shake on means something different on each.

Issuing new shares and selling your own are different transactions

An issuance creates shares that did not exist. Your partner subscribes, the money goes into the corporation’s account, and share capital rises by what was paid. Your certificate does not change; the denominator does. Nothing left your hands, so there is no disposition and no gain. The business is funded. You are not.

A transfer moves shares that already exist. The corporation is not a party and not a dollar arrives inside it. You have a disposition of capital property at fair market value, a gain measured against the adjusted cost base of the shares sold, and half of it in your 2026 income at the 50% inclusion rate. Where the shares qualify as small-business-corporation shares, the lifetime capital gains exemption — C$1,275,000 for 2026 dispositions — can shelter it, though whether they qualify was decided years before the sale rather than at it.

Where the money is needed picks the route. A partner funding equipment or hires subscribes; a partner buying you down toward retirement buys from you.

Two things to check before you agree on a percentage

Votes first. Cross half of them and your partner has acquired control, which generally means a deemed year-end for the corporation and a restriction on what it can do with earlier losses. Then ask what else your partner owns. Corporations associated under the CRA’s rules share one federal small-business limit — the first C$500,000 of active business income taxed at 9% for an eligible CCPC — rather than each getting one, so a partner who already runs another company can divide your limit rather than double it.

The price is a tax number before it is a negotiation

Between two people negotiating at arm’s length, the price they reach is usually strong evidence of fair market value. Where the parties are not at arm’s length — a child, an in-law, a spouse’s company — the CRA is generally entitled to substitute value for the stated price. Issue shares to a related person below what they are worth and value moves out of the existing shares into the new ones, with the difference landing in somebody’s hands as a benefit.

The number also gets asked for more than once, which is the argument for building it now. It sets your proceeds on a transfer and your partner’s cost base either way, and the buy-sell clause will need it years later on a day nobody chooses. Value the business the year the second name goes on the register, then keep the basis current annually — normalized earnings, the multiple, the balance-sheet adjustments, written down and dated. A figure computed at the time is worth several reconstructed afterwards.

A worked example: 25% of a C$900,000 business, two ways

Illustrative, round numbers, December 31 year-end. You own all the shares of a corporation the two of you agree is worth C$900,000, your partner is coming in for 25%, and the shares carry a nominal C$100 cost base.

Bought from you, a quarter of your shares costs C$225,000 and the money goes to your personal account. The cost base is essentially nil, so the gain is roughly C$225,000 and half of it — C$112,500 — is a taxable capital gain on your 2026 return. If the shares qualify and your exemption is untouched, that gain can be sheltered. The corporation ends the day with the cash it started with.

Subscribed instead, the arithmetic runs the other way. To hold 25% afterwards your partner subscribes for C$300,000: the corporation was worth C$900,000 before the money arrived and C$1,200,000 after, and C$300,000 of C$1,200,000 is a quarter. The cash is in the business and you report nothing. You are also no poorer — 75% of C$1,200,000 is C$900,000, exactly what 100% of C$900,000 was. Dilution at the right price costs percentage, not value.

The subscription does not sit neutrally. Until it is spent, C$300,000 is surplus cash, and surplus cash is generally not an active-business asset — enough of it and shares that would otherwise qualify stop qualifying. Money that funds a build-out next quarter is invisible; money that sits three years is a problem you created deliberately.

One dividend, two partners who want different things

A dividend declared on a class of shares goes to everyone holding that class, in proportion, on the same day. That constraint surfaces the first year one of you wants cash and the other wants to leave it in. Two owners holding identical shares cannot be paid different amounts without paying both — which is why partner corporations are usually set up with a separate class for each owner, and why retro-fitting that later is a share reorganization rather than a paragraph in the articles.

Separate classes solve timing, not everything. Where the disagreement runs deeper — one partner wanting the money out, the other wanting it invested — the answer is generally a holding company each.

TOSI now tests your partner’s family too

The tax on split income does not attach to your family. It attaches to your corporation. The day your partner holds shares, their spouse and adult children stand in the same relationship to your business that yours do, and a dividend to any of them is split income unless that person fits an exclusion. Being the founder does not insulate you from a decision your partner makes at home.

The exclusions work identically on both sides of the register — roughly 20 hours a week in the business, or shares clearing the excluded-share test — and the detail is the same detail. The carve-outs matter before the deal: excluded shares are generally unavailable where the corporation is a professional corporation, or where 90% or more of its business income comes from services. Those test the corporation rather than the person, so if that door is shut for your family it is shut for theirs.

The shareholder agreement is the paper everyone skips

No tax rule requires one. What exists instead is a pattern: the partnership with an agreement survives its first serious disagreement, and the one without it gets settled by whoever can afford the longer argument. It is a lawyer’s document — we do not draft it. Recognize the terms anyway:

• Buy-sell — what happens to the shares on a death, departure, disability or divorce, at what price, and where the money comes from. Corporate-owned life insurance is the usual funding, and the death benefit leaves the corporation through the capital dividend account.
• Drag-along — where a buyer wants the whole company and the majority accepts, the minority can be required to sell on the same terms. Without it, a 25% holder can block the sale.
• Tag-along — the mirror. Where the majority sells, the minority can require the buyer to take their shares at the same price.
• The valuation clause — a formula, an annually agreed figure, or a named valuator to set the price when one of the clauses above fires. This is what the yearly valuation habit feeds.

One nearby transaction is not this one. Capping your value at today’s number so your partner takes the growth is a freeze, and freezes are referred out.

What Cadence does

We price both routes before you agree on a number: what a transfer would put on your personal return next April, what a subscription would put in the corporation’s account instead, and which one the business needs this year. We build the working valuation basis from your own returns and refresh it annually, so the figure the agreement leans on has a history. A signed valuation report for a contested price or a dispute is a valuator’s work and we refer it out, along with the agreement and the share issuance, which belong to counsel. Before closing we run the association question against what your partner owns; after it, we keep the share register, the resolutions and the dividend declarations tied to the classes they were declared on. The C$3,000 Compliance tier covers the annual returns, with a second shareholder’s personal return scoped at the estimate rather than assumed; the modelling, the association check and the valuation refresh are planning work and sit in the year-round packages. Consultants and agency owners raise this most, usually a few weeks after the handshake and just before the lawyer needs a number.