Entity Setup
How Entrepreneurs Can Structure Their Business Entity in Canada Post-Budget 2025
Budget 2025 proposes new rules affecting entities: SR&ED expansions, trust transfers, and tax deferral through tiered structures, shaping how start-ups choose entity form.
By NomadicTax Research Team • 5-8 min read • February 26, 2026
## Recent Policy Signals Affecting Entity Structure
- **SR&ED program expansion**: Budget 2025 proposes to increase the expenditure limit for enhanced refundable SR&ED credits from $3 million to **$4.5 million**, adjust phase-out thresholds and make public corporations eligible. Applies from fiscal years starting likely **2022 through 2035**. ([budget.canada.ca](https://www.budget.canada.ca/2025/report-rapport/tm-mf-en.html?utm_source=openai))
- **Tax Deferral Through Tiered Corporate Structures**: Changes intended to close gaps where Canadian controlled private corporations (CCPCs) defer taxation by layer structure. Proposed rules target investment income across associated corporations. Budget measure expects phase-in after Budget Day. ([budget.canada.ca](https://www.budget.canada.ca/2025/report-rapport/tm-mf-en.html?utm_source=openai))
- **Home Accessibility vs Medical Expense Credits**: As of 2026, expenses cannot be claimed under both credits. Budget 2025 proposes amending the Income Tax Act so that one expense used in Home Accessibility Tax Credit cannot also be claimed under Medical Expense Tax Credit. ([budget.canada.ca](https://www.budget.canada.ca/2025/report-rapport/tm-mf-en.html?utm_source=openai))
## Choosing Structures Based on These Changes
| Entity Type | Advantages Pre-Change | Changed and Emerging Considerations |
|-------------|------------------------|-----------------------------------------|
| **CCPC (Canadian Controlled Private Corporation)** | Access to SR&ED refundable credits, income splitting, preferential tax rates on first dollars of business income. | With expanded SR&ED eligibility and phase-out delays, CCPCs with growth potential and R&D should evaluate increasing R&D spend now. Tiered structure tax deferral rules will limit using associated corporations to defer investment income. |
| **Trusts** | Often used for estate planning, holding passive or active income, creditor protection. | The proposed anti-avoidance rules for direct trust-to-trust transfers are broadened to include indirect transfers; planning must consider substance and permanence. |
| **Sole proprietorship / Partnership** | Simplicity, lower overhead, personal losses flow-through. | For entrepreneurs with high R&D, or expecting high growth, the corporation may now offer better net after-tax benefit, especially with SR&ED expansion. |
## Practical Structuring Decisions
- **SR&ED Focused Startups**: If R&D intensive, structure as CCPC to capture the enhanced refundable credit, especially with larger limit and expanded eligibility. Plan spending to fall within enhanced thresholds.
- **Passive Investment Holding**: Be cautious with associated companies or tiered structures; proposed deferral rules may require consolidated treatment and could trigger unwanted taxable income sooner.
- **Dual-Use Property Investments & Credit Claims**: If making renovations or accessibility improvements for older or disabled persons, determine whether expense qualifies under accessibility tax credit or medical credit—choose based on which yields more benefit in the context of your entity and whether combined claims are allowed. |
## Example Scenarios
- **Tech startup with R&D in 2025-2026**: Incorporate as a CCPC; aim spending so that you hit the new $4.5M refundable credit threshold. Filing revenue forecasts accordingly.
- **Holding company with multiple subsidiaries**: Examine the impacts of tax deferral rules under tiered structures—perhaps restructure to flatten ownership or ensure associated entities not artificially splitting investment income.
- **Small business planning retirement or sale**: Using trusts or shares, review whether Lifetime Capital Gains Exemption is still available, and whether the changes in inclusion rates (when effective) will affect the future gain. (Note: the proposed capital gains inclusion rate changes to 2/3 on gains in excess of $250,000 starting Jan 1, 2026 for individuals and all gains for corporations; remains *proposed*. ) ([canada.ca](https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/update-cra-administration-proposed-capital-gains-taxation-changes.html?utm_source=openai))
## Actionable Steps for Entrepreneurs
1. Model forecasts with current vs proposed rules—especially for entities with multiple associated corporations.
2. Consult with professional to assess whether incorporation is favorable vs leaving operations as sole-proprietorship.
3. If using trusts, map out transaction flows to ensure trust transfers are not caught under new anti-avoidance rules.
4. Track proposed legislation and regulatory drafting to adjust entity setup *before* rules become law where possible.
**Bottom line**: Budget 2025 changes reshape the calculus for entity selection, especially for R&D, passive income deferral, and credit claiming. Structuring with foresight will help entrepreneurs maximize benefits and avoid surprises.