Turning Years of Unpaid Work Into Real Shares in Ajax

The situation

Sarah worked full-time as a paramedic when she and her brother Paulo incorporated a small services company in Ajax nine years ago, each holding half the shares on paper. Sarah's spouse, Fernanda, worked full-time as an IT support lead but spent most evenings and every second weekend running the company's books, scheduling, and client communications for no pay and no formal role. It was, in practice, a second job. Nobody thought to document it as one.

The company grew slowly and then not so slowly. By the time it was bringing in roughly $2.4 million a year in revenue, with a modest but real equity value built up in retained earnings and goodwill, Fernanda's unpaid contribution was hard to ignore. She had effectively been running the back office of a growing company for years, on top of a full-time job, with nothing in writing that recognized it and no path to walking away with anything if the marriage or the business ever changed. Sarah wanted to fix it: give Fernanda actual shares, reflecting years of work that had, by any fair reading, built a meaningful part of the business. She assumed it would be a matter of updating some paperwork. It was not.

The legal problem

Under the Business Corporations Act (Ontario's corporate statute, commonly called the OBCA), a corporation can only issue shares in exchange for consideration the board has decided is the fair equivalent of those shares' value. Past services already performed can count as valid consideration. A vague promise to "give her a piece of the company someday" cannot — and if the company had ever tried to formalize that promise loosely, it risked being unenforceable or, worse, being treated by the Canada Revenue Agency as something other than what everyone intended.

The bigger complication was tax, not corporate law. Shares issued to someone in exchange for services are not a gift in the eyes of the Income Tax Act. They are treated as a taxable benefit, valued at the fair market value of the shares on the date of issuance, and included in that person's income for the year. If Fernanda received a 25 percent stake valued at roughly $220,000, she would be personally taxed that year as though she had earned $220,000 in income — with no cash changing hands to help her pay the resulting tax bill. That is the trap that catches founders and family businesses most often: the shares feel like recognition, but the tax office treats them like a paycheque, due all at once.

There was a third layer. Paulo, as the company's other registered shareholder, would see his proportional stake diluted the moment new shares were issued to Fernanda. He had never formally agreed to that, and the company had no shareholder agreement setting out how ownership decisions like this one were supposed to be made. Any issuance done without his clear, informed consent risked a dispute down the line — precisely the kind of family business conflict that is far easier to prevent than to unwind.

What we did

1. Reviewed the corporate records first. The company's minute book was incomplete, with no shareholder agreement and no history of resolutions beyond the original incorporation documents. Before anything could be issued properly, the existing share structure had to be confirmed and the gaps in the record identified.
2. Documented Fernanda's contribution as past services rendered, not a future promise. This distinction mattered for both the corporate law analysis and the tax treatment. We worked with Sarah and Fernanda to put together a clear written record of the work performed over the prior years, which supported treating the share issuance as compensation for services already delivered rather than an ambiguous gift or an unenforceable future commitment.
3. Coordinated with the company's accountant to get a proper valuation. We do not perform business valuations ourselves, but a defensible fair market value for the shares was essential — both to satisfy the board's obligation under the OBCA and to give Fernanda and the CRA a number that would hold up if ever questioned. The valuation came back at roughly $880,000 for the company's total equity, supporting a 25 percent stake worth about $220,000.
4. Structured the issuance in two tranches across two tax years. Rather than issuing the full stake at once and handing Fernanda a single-year tax bill on $220,000 of deemed income, we advised splitting the issuance roughly in half across two calendar years, each supported by its own board resolution and its own valuation date. This did not reduce the total tax owed, but it spread the liability so Fernanda could plan for it rather than being blindsided by one enormous bill.
5. Brought Paulo into the process directly. We explained the dilution to Paulo in plain terms — what his percentage stake would become, and why the company was doing it this way. He had genuine questions about control and about whether this would happen again for other contributors down the line. Working through those questions before the resolutions were signed avoided a dispute after the fact.
6. Drafted a shareholder agreement for the first time. Once all three were shareholders, we put in place an agreement covering transfer restrictions, a right of first refusal if anyone wanted to sell, decision-making thresholds for major company actions, and a process for valuing and issuing shares in the future — so the next contribution like Fernanda's would not require solving the same problem from scratch.
7. Advised Fernanda separately on the personal tax consequence. Because the share issuance created taxable income for her individually, not for the company, we made sure she understood what to expect on her personal return and encouraged her to loop in her own accountant well before filing season.

The outcome

Fernanda's ownership was formalized cleanly: 25 percent of the company, issued in two tranches, each supported by a proper board resolution, a documented valuation, and a clear record that the shares compensated work already performed. The corporate minute book, which had been thin for nine years, was brought current. Paulo consented to the dilution with a full understanding of what it meant, and the new shareholder agreement gave all three a shared framework for the next disagreement, rather than leaving it to be worked out informally in the middle of a crisis.

The tax consequence was real. Fernanda owed tax on roughly $220,000 of deemed income spread across two years, and that bill did not disappear because the shares had been earned rather than paid in cash. But because it was anticipated, valued properly, and staggered, she was able to plan for it rather than face a surprise assessment years later when the CRA might have questioned an informal arrangement. The company itself avoided a much worse outcome: an ownership structure built on an undocumented understanding, discoverable only if a dispute, a sale, a divorce, or an audit ever forced the question.

What you can learn from this