Three tools for splitting income, sheltering retained earnings, and planning succession in a BC private company — and the situations where each one is the right call.
The original share structure post covered the basics — voting versus non-voting, common versus preferred, the mechanics of dilution. This one goes a layer deeper into the structures BC family businesses actually use. Three tools come up repeatedly: a holding company sitting above the operating company, a family trust holding the growth shares, and multiple classes of shares with different dividend rights. Each does specific work. Each costs money to set up and maintain. None of them is automatically the right answer.
This post explains when each one earns its keep — and where the post-2018 TOSI rules narrow the historical playbook.
A BC operating company that has been profitable for a few years usually accumulates cash. Some of that cash is needed for working capital and reasonable contingencies. The rest is excess — sitting in the operating company’s bank account, exposed to the operating company’s creditors, customers, and litigation risks.
A holding company solves this. The owner sets up a BC corporation (the “holdco”) that owns the shares of the operating company (the “opco”). The opco continues to operate the business. Excess cash gets paid up from opco to holdco as a tax-deferred inter-corporate dividend under section 112 of the Income Tax Act. The holdco invests the cash, holds the investments, and is generally not exposed to the operating risks of the underlying business.
For a BC family business, the holdco structure delivers three things:
Creditor protection for retained earnings. Cash sitting in holdco is not available to opco’s creditors. If opco gets sued, the holdco’s assets are not on the table — subject to standard creditor-protection limits around fraudulent conveyance and recent transfers.
Tax-deferred movement of cash. Dividends from opco to holdco are tax-free between Canadian taxable corporations under section 112. Cash can move from opco to holdco without the personal tax cost that a dividend to the individual owner would trigger.
Investment flexibility. Holdco can hold real estate, public-company shares, private investments, or further private companies — all under one umbrella, without each requiring its own structure.
The trade-offs: two corporate T2 returns each year, two sets of annual filings, two transparency registers, and the additional accounting and legal cost of running two corporations. For a BC small business with under $200,000 of consistent retained earnings each year, the cost often exceeds the benefit. For a business with $500,000+ of annual retained earnings, the holdco usually pays for itself within the first couple of years through the combination of creditor protection and the ability to invest the funds outside opco’s risk envelope.
A family trust is a more complex tool and is reached for when the planning goal is to allocate future business growth and future dividend streams to family members in a way the share-class-by-itself structure cannot achieve.
The classic pattern: a discretionary family trust is set up with the founder, spouse, children, and a corporate beneficiary as the named beneficiaries. The trust holds the common (growth) shares of opco — or, in a holdco structure, the common shares of holdco. The founder holds fixed-value preferred shares representing the frozen current value of the business. From the freeze date forward, future appreciation accrues to the common shares held by the trust, not to the founder personally.
When the business is later sold or pays dividends, the trustees can allocate the gain or the dividend among the beneficiaries — including the corporate beneficiary, which receives the income tax-deferred under section 112. The corporate beneficiary can then pay dividends to the underlying individual beneficiaries on a schedule that fits their personal tax situation.
The family trust is also the standard tool for accessing the Lifetime Capital Gains Exemption (LCGE) on a future sale of a Qualified Small Business Corporation. Each individual beneficiary of the trust can potentially claim their own LCGE — currently $1,016,836 in 2024 — multiplying the exemption across the family. The structure has to be set up correctly years in advance of the sale to work.
The costs are real. A family trust set-up with full corporate reorganisation usually runs $10,000 to $18,000 in combined legal and tax-advisor fees. Annual maintenance — the T3 trust return, trustee meetings, formal allocation decisions, ongoing tax advice — usually runs $2,000 to $4,000 per year. And every 21 years the trust hits the deemed disposition rule under section 104(4), requiring a planning transaction to manage the tax exposure.
Family trusts are powerful and they are also a meaningful ongoing administrative commitment. They make sense when the planning goal is multi-generational wealth transfer, multiple LCGE claims, or sustained dividend splitting that the post-2018 TOSI rules permit (the “excluded shares” test and the founder-over-65 exception both leave doors open for trust-structured dividends to specified individuals, with the right facts).
The simplest of the three tools. Instead of one class of common shares, the corporation has two or three: Class A voting shares (held by the founder), Class B non-voting shares (held by the spouse), Class C non-voting shares (held by the children or a trust). Each class has its own dividend rights — Class B and Class C can receive dividends at different times and in different amounts than Class A.
The classical use case was income splitting: pay dividends to a spouse at the spouse’s lower personal tax rate, reducing the family’s combined tax bill. Pre-2018, this was a routine planning move for BC private companies.
TOSI changed the math substantially. Under the post-2018 rules, dividends paid to a “specified individual” (spouse, adult child, related party) are taxed at the top marginal rate unless the recipient meets one of the TOSI exclusions:
The multi-class structure still has uses post-TOSI:
The most common BC family business structure today is a layered one: an opco holding the operating business, a holdco above opco owning the opco shares (creditor protection plus retained-earnings shelter), and a family trust holding the holdco’s common (growth) shares (multi-generational planning and LCGE multiplication). The founder holds the holdco’s fixed-value preferred shares. The trust’s beneficiaries include the spouse, children, and possibly a corporate beneficiary.
This structure is overkill for most BC small businesses. It is the right structure for a profitable BC private company expecting meaningful growth over the next ten to twenty years, where the founder wants to plan succession with the next generation and is willing to maintain the corporate and tax machinery. Setup is $15,000 to $25,000 in combined legal and tax fees. Annual maintenance is $5,000 to $10,000.
For most BC businesses, a single corporation with a simple share structure is the right answer — at least until the business consistently generates retained earnings above $200,000 and the owner has identified a specific planning goal that justifies the move to a layered structure.
A rough guide:
We are corporate lawyers; we work alongside the family’s accountant on every structure decision. The corporate side covers the incorporation, the share structure, the reorganisation steps under section 85 or 86, the trust deed, the family trust’s tax filings (in coordination with the accountant), and the ongoing annual maintenance.
The tax side — the actual TOSI analysis, the projected tax saving from each structure, the LCGE planning — belongs with the accountant. Both sides have to work together; a corporate reorganisation done without tax-planning input is a recipe for unintended tax consequences.
If you are running a BC private company that has grown past the simple-structure stage, contact us with the basics — what the business does, what the current structure is, what the current annual retained earnings look like, and what the planning goal is. We work with the accountant and come back with a structure proposal and a quote. For background on the basic share-structure choices, see our share structure primer and our shareholder agreements post.
Written by Lime Law Corporation. This article is general information about BC law as of May 25, 2026. It is not legal advice. If you have a specific matter, contact us — and please do not rely on a blog post in place of advice on your file.
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