Turning a Side Business Into a Family Company in North York

The situation

Fiona worked as a personal support worker, visiting clients in their homes across North York. Kenneth worked nights as a security guard. Three years earlier, they had bought into a home-care franchise as a side venture, thinking it might bring in a bit of extra income on top of their day jobs. It grew faster than either of them expected. By the spring, the franchise was billing roughly $100,000 a year, with a small roster of part-time caregivers doing the visits Fiona no longer had time for herself.

When they first incorporated, a lawyer had set them up quickly and cheaply with the simplest structure available: one class of common shares, split evenly between Fiona and Kenneth. It worked fine when the business was barely breaking even. It stopped working once the business started generating real profit and the family started thinking about who should share in it.

Their adult daughter, Beth, had left a retail job to help run the franchise's scheduling and client intake almost full-time. She wasn't paid a market wage for what she was doing, but she was doing the work. At the same time, Fiona and Kenneth wanted to start setting money aside for Beth's younger siblings, using the corporation's profits rather than paying everything out to themselves personally and then gifting it after tax. A family member suggested a family trust as a way to hold shares for the children's future benefit. None of it fit inside the two-shareholder, one-class structure they already had.

The problem

Two separate obstacles stood between the family and the plan they had in mind.

The first was tax. Under the Income Tax Act, dividends paid to family members who don't actively work in a business can be taxed at the top personal rate no matter how little income that family member otherwise has — a rule commonly aimed at "income sprinkling." There is an exception for shares that meet certain tests, including one that looks at whether the shareholder works a meaningful number of hours in the business. Beth's hours-heavy involvement likely supported treating her shares favourably. The younger siblings, who did no work in the business at all, did not fit that exception at all — which meant a trust holding shares for their benefit needed to be structured carefully, and even then, dividends flowing to them for their direct benefit could be taxed punitively unless the money was genuinely used for things like their education.

The second obstacle was the franchise agreement itself. Like most franchise agreements, it restricted who could own shares in the corporation that held the franchise. Any change in ownership — including adding a new shareholder or a trust — required the franchisor's written consent, and the agreement gave the franchisor broad discretion to refuse. Fiona and Kenneth had never read that section closely. They assumed that because they owned the company, they could restructure it however they liked. They could not, not without the franchisor's sign-off, and the franchisor had never dealt with a trust as a shareholder in any of its other locations.

Layered on top of both problems was a structural one: a single class of common shares can't treat shareholders differently. Every share gets the same dividend, the same voting rights, the same everything. To pay Beth a dividend one year without an equal dividend automatically flowing to a discretionary trust, or to give the trust non-voting shares while Fiona and Kenneth kept control, the corporation needed multiple classes of shares with different rights attached to each — something the original one-class setup could not do.

What we did

1. Reviewed the franchise agreement's ownership provisions in full. Before touching the share structure, we confirmed exactly what consent the franchisor could demand, what grounds it had to refuse, and what notice period applied. This shaped everything that followed — there was no point designing a structure the franchisor was contractually entitled to block.
2. Mapped the family's actual goals against the excluded shares test. We walked through, in plain terms, which family members' involvement in the business could support favourable tax treatment on dividends and which could not. Beth's day-to-day hours put her in a materially different position than her younger siblings, who had no involvement at all — a distinction that had to drive the structure, not just the family's sense of fairness.
3. Restructured the share classes. We amended the corporation's articles to create separate classes of shares: voting common shares retained by Fiona and Kenneth to keep control, a class for Beth reflecting her active role, and a discretionary class the corporation could issue dividends on independently of the others — the mechanism that would let a trust receive income for the younger children without being tied to what Beth or her parents received in the same year.
4. Drafted the family trust and coordinated its interaction with the corporation. The trust was set up to hold shares for the benefit of the younger siblings, with clear terms about how and when funds could be used for their benefit, and named trustees who were not the same people who controlled the operating company — a separation the franchisor's lawyers specifically asked about.
5. Approached the franchisor formally, before making any changes. We submitted the proposed structure for consent well ahead of any planned dividend payments, with an explanation of who would ultimately control the business and why the ownership changes did not affect day-to-day operations of the franchise location.
6. Negotiated through the franchisor's objections. The franchisor's initial response rejected the trust holding shares directly, citing concerns about not knowing who the beneficial owners were and about enforcing the agreement against a trust rather than a person. That rejection became the starting point for a negotiation rather than the end of the plan.

The outcome

The franchisor would not approve the family trust as a direct shareholder of the operating corporation. Its position, after several rounds of back-and-forth, was that it needed a natural person or a company it could hold directly accountable under the franchise agreement, not a trust with its own separate set of legal obligations. That was a real limit on what the family had originally wanted.

What the family and the franchisor settled on instead was a compromise. A holding corporation was inserted above the operating franchise company — something the franchise agreement's consent provisions turned out to permit with less friction than a direct trust shareholding, since the franchisor could still see through to Fiona and Kenneth as the controlling minds. The family trust held shares in the holding corporation rather than the franchise operator itself, one step removed from the entity the franchisor actually contracted with. Beth received her own class of shares directly in the operating company, reflecting the work she was actually doing, which the franchisor accepted without objection once it understood she was an active manager rather than a passive investor.

The result gave the family most of what they were after — income splitting potential through the trust, direct recognition of Beth's role, and Fiona and Kenneth keeping voting control — but it took an extra corporate layer, a longer negotiation with the franchisor than anyone anticipated, and a structure slightly more complex, and slightly more expensive to maintain each year, than the one the family had first asked for. Kenneth put it plainly at the end of the process: they got a structure that worked, just not the simplest version of it. That is a realistic outcome when a franchise agreement's ownership restrictions run into a family's tax and succession planning at the same time — neither side gets everything, and the final structure has to satisfy both.

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