Structuring a development business: one company per phase, and the rate you end up paying

One company, or one per phase?

Construction lenders frequently require, and many developers independently choose, a standalone corporation for each project or phase, so that one phase's lender security, warranty exposure and lawsuit risk cannot reach into another, protecting a healthy phase from a problem that started somewhere else entirely. The trade-off is real: more T2 returns, more minute books, and coordination across a group of associated corporations that share one small business deduction limit rather than each getting a full one. Each entity that sells new homes to the public also needs its own builder licensing where that applies, so the administrative load rises with every phase you ring-fence. Some developers manage that load with a shared services agreement — one entity provides accounting, payroll and administration to the others for a fee — which keeps the ring-fencing intact without duplicating every back-office function project by project.

Land you already own hits the same rollover wall builders hit

Section 85 lets most business assets move into a corporation without triggering tax immediately, but real property held as inventory is specifically excluded from eligible property. A developer who has been assembling parcels personally, or through an existing numbered company, for years before deciding to build cannot roll that land into a new development corporation tax-free. What a section 85 rollover does and does not cover sets out the mechanism; for land assembled ahead of a rezoning application, the practical choices are a sale to the new corporation at fair market value, crystallizing the gain now, or developing the first phase in the existing entity and starting the ring-fenced structure with the next parcel. Land transfer tax applies to a sale between the owner and the new corporation just as it would to any arm's-length transfer, so that cost belongs in the comparison too, not treated as a rounding error next to the tax deferral being given up.

Selling and holding are taxed at different rates for a reason

Selling inventory to the public is active business income, generally eligible for the small business deduction subject to the taxable-capital grind and however the deduction is shared across your associated corporations. The moment a building is finished and tenanted instead of sold, that changes: a corporation earning rental income is normally treated as earning income from a specified investment business, taxed at the higher rate with no small business deduction, unless it employs more than five full-time employees year-round — a bar most single-building holding entities never clear. That is why developers who plan to hold sometimes pair the property-holding entity with a separate management corporation that does employ the leasing and maintenance staff and bills a market-rate fee, keeping at least that fee income taxed as active business income even while the underlying rent is not. The fee has to reflect what an arm's-length manager would actually charge and be supported by a written agreement, or CRA can simply reallocate the income back to where it decides it belongs. Whether a holding company makes sense is worth reading once a project starts generating retained profit worth protecting from operating risk.

Bare trustees hold the title, the JV agreement holds the deal

A nominee or bare trustee corporation registered on title for a joint venture is not a separate taxpayer for the project's activity — it holds legal title only, while the JV agreement among the actual participants governs profit sharing, capital calls and decision authority. That agreement needs to exist and be signed before the first parcel closes, not drafted after a dispute makes everyone wish it had been, since renegotiating capital-call terms in the middle of a cost overrun rarely goes well for anyone involved. Our developer bookkeeping page covers how a bare trustee structure is reflected in the books; the general incorporation engagement is on our incorporation and compliance page.

Source: CRA — Specified investment business.