Tax Planning for Startups in Canada

This guide walks founders through seven tax planning moves.

1) Should you incorporate?

A corporation can lower your tax bill when profits stay in the business, protect you from personal liability, and make it easier to raise money and issue options. If you’re still burning cash and need the losses personally, wait.

If you are wondering if you should incorporate, ask yourself four questions:

Will profits stay in the business for 12 months or more?
Are you seeking outside equity or planning to issue employee stock options or RSUs?
Does the product carry meaningful liability risk?
Can you live off other income or limited income while the company grows?

If you answer yes to any of these questions, it may be worth incorporating.

Read the full guide: Should I Incorporate My Startup in Canada?

Feature	Sole Proprietor	Corporation
Personal liability	Unlimited (personal assets at risk)	Limited to corporate assets (with exceptions)
Tax on first $500 k of profit	Up to 53.5 % (Ontario)	9–12 % tax rate rate
Reinvest after‑tax cash	Hard, major tax upfront	Easy, retain profits in corporation
Raise VC equity or issue stock options/RSUs	Rarely possible	Standard practice
Use early losses	Offset personal income	Losses trapped in company
Annual compliance	One T1 return	T2 return, minute book, payroll

2) Grants and Tax Incentives

Grants and tax credits can cover a big chunk of payroll and R&D. The largest program is SR&ED. You can stack provincial credits and, in many cases, grants.

What to look at first

SR&ED for Canadian R&D. Canadian corporations get a 35% federal refundable credit (meaning they will issue you a cheque if you aren’t paying any taxes). Stacked with Ontario, many startups recover an effective ~66% of eligible salary-based R&D costs.
OITC (or your provincial equivalent). Ontario’s innovation tax credit is 8% and refundable. It works similar to SR&ED.
IRAP. Many projects get up to ~80% of eligible salaries and ~50% of contractors, subject to approval

Story: A Toronto AI startup spent $180,000 on dev payroll and interactive media work and ended with roughly $112,000 back across SR&ED, OITC, and OIDMTC. Net cost: ~$68,000.

Do this

Keep Canadian work in Canada where possible. Foreign contractors usually don’t qualify for SR&ED.
Track time, roles, and experiments as you go. Paperwork beats memory.

Read the full guide: Tax Incentives, Tax Credits, and Grants for Startups in Canada

Program	Who Can Apply	Eligible Costs	How Much Can You Get Back?
SR&ED (Scientific Research and Experimental Development)	Canadian-controlled private corporations doing R&D in Canada	Salaries, materials, contractors for experimental work	Up to 66% refund of eligible costs (Ontario)
IRAP (Industrial Research Assistance Program)	Canadian-owned small/medium businesses	Salaries of technical staff on an approved project	Up to 80% of salaries
AI Compute Access Fund	Canadian AI-focused companies	Access to advanced GPUs and cloud resources	Free/subsidized compute credits (can be worth hundreds of thousands)
Ontario Innovation Tax Credit (OITC)	Ontario-based companies doing SR&ED	Same costs as SR&ED (Ontario portion)	12% refundable credit
OIDMTC (Ontario Interactive Digital Media Tax Credit)	Ontario companies building interactive software/games	Labour, marketing, and distribution costs	35–40% refundable credit
Co-op Tax Credit	Businesses hiring co-op students	Co-op student wages	25–30% of wages
Summer Student Grants	Businesses hiring summer students	Summer student wages	Up to 50% of minimum wage
Other programs (CanExport, Mitacs, Canada Growth Fund)	Varies by program	International expansion, research partnerships, clean innovation	Grant amounts vary by program

3) Paying yourself: salary or dividends?

For most early-stage founders, salary wins. It builds RRSP room, helps with CPP, and, most importantly, salary can be eligible for SR&ED and many grants. Total tax is often similar either way.

When dividends can make sense

Cash crunch and you must avoid CPP this year.
You have a lot of investment income and are trying to recover tax from investment income in the corporation, subject to investor constraints.

Story: Amar paid himself all dividends to save on CPP. But his SR&ED claim would have been larger if he’d used salary. Switching to a salary added real cash back to the business via credits.

Read the full guide: Salary vs. Dividends for Startup Founders

4) Income splitting for startup founders

Split income across family members who are in lower tax brackets, but avoid the punitive ‘TOSI rule’. The two most useful routes for founders are:

Pay reasonable salaries for real work to family members.
Pay dividends to a family member who works on average 20 hours per week for the business (no reasonability limit).
For certain businesses (usually non-service businesses), pay dividends to a family member if they own more than 10% of the company.
Pay dividends to your spouse if you’re 65 or above.

Why this matters: 38% of startups fail because they run out of cash. Smart splitting can reduce your household tax bill so you take home enough while keeping more cash in the company.

Read the full guide: Income Splitting for Startup Founders

5) Pay less tax when you sell your startup

Many startup founders wait until it’s time to sell before they think about taxes. The best way to save tax on a sale is to think about it when starting.

One pillar dominate founder exits: the Lifetime Capital Gains Exemption (LCGE) which lets each person sell $1.25M worth of your business tax-free if they meet some requirements..

Do this early

Keep active business assets in Opco and move surplus cash and investments to a holding company to help ensure you can use the LCGE on a sale.
Consider a family trust so multiple family members can each use their LCGE on a future sale.

Read the full guide: Pay Less Tax When Selling Your Startup Business in Canada

6) Compensating your team: cash, options, RSUs

Your comp mix affects hiring, retention, and taxes for you and your team. This is how you should be thinking about compensation.

Design tips

Use salary and bonuses for SR&ED and grants. This way, the government will essentially reimburse you for some of your compensation. Equity alone won’t generate credits.
Employee stock options are good for incentivizing growth without using cash. But you will be reducing your equity in the company.
RSUs are simpler for employees but taxed as income when they vest. You don’t use cash but you give up equity in the company.

Read the full guide: “Employee Compensation for Canadian Startups.”

7) Selling to a U.S. buyer or moving south? Plan cross-border early

U.S. tax can sneak into the picture as many startups eventually do business or expand to the U.S..

Watch-outs

U.S. state sales tax. Similar to GST/HST, each state has their own sales tax rules. Make sure you’re in compliance or you will be on the hook.
Income tax. As you expand to the U.S., you may have to pay income tax there. Otherwise, if the IRS finds out, you could be liable for the tax and massive penalties.
Structure. Some structures work better than other structures in the U.S. If you know you will be expanding to the U.S., it is worth exploring.

Read the full guide: U.S. Cross-Border Tax for Canadian Startups

Pulling it all together

A tax plan for you and your startup:

Structure. Confirm whether to incorporate now or wait. If incorporated, confirm share classes, option pool, and whether you need a holding company.
Funding. Map SR&ED eligibility and line up IRAP or other programs. Set up time tracking and experiment logs to ensure you have documentation requirements.
Founder pay. Switch to salary if you want tax credits and RRSP room. Revisit dividends only once cash is abundant.
Family. Pay reasonable salaries. Document spouse or adult-child hours to meet the 20-hour test if you plan future dividends.
Exit. Set up a trust and holding company to potentially sell your startup tax-free.

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