By Mehr Sokhanda
Angel investing offers exciting opportunities to support innovation and generate returns, but it also comes with important tax considerations. At a recent Brampton Angels 101 session, Louis Sapi, Chair of Brampton Angels and Founder of HS & Partners LLP, and Sonia Vaknin, Director of Tax, with over 25 years of experience, also with HS& Partners, shared essential insights into tax planning for angel investors.
Together, they unpacked the practical strategies that investors should use to structure deals, minimize liabilities, and maximize long-term wealth.
1. Tax Planning Has Three Core Components
Sapi broke tax planning into three interconnected categories: “There are structural solutions, procedural solutions, and then there are product solutions.” Each of these plays a critical role in shaping the tax outcomes of your investment activities.
Structural planning refers to the legal frameworks through which investments are made—such as corporations, holding companies, or family trusts. Procedural planning involves how income and capital flow through these structures, including decisions around timing, payments, and reporting. Product solutions relate to investment tools like flow-through shares, tax shelters, or life insurance vehicles. However, as Sapi pointed out, building a complex structure without understanding how to use it is a wasted opportunity: “I can’t tell you how many people spend a lot of money creating complicated structures and they don’t use it properly. It’s like having a Ferrari and you never take it out of the driveway.”
2. Get the Structure Right—Early
The earlier you design your investment structure, the better. Both Sapi and Vaknin emphasized that restructuring later can be cumbersome and expensive. For investors—and especially startup founders investing in their own ventures—laying down the right foundation early on can save years of complication and costly tax exposure.
“You can create a structure today at a certain dollar cost, and if you want to change it down the road, it’s going to cost you a lot more,” Sapi noted. The takeaway? Don’t delay thinking about structure until there’s a liquidity event in sight. Set up your legal entities with a forward-looking mindset so that your exits, gains, and potential losses are all positioned optimally from day one.
3. Plan with the End in Mind
Strategic planning begins with clarity on your long-term goals. Sapi used a relatable metaphor to stress the importance of foresight: “You don’t drive a car looking at your steering wheel. You drive a car looking down the road. Investing in businesses is no different. You want to look down the road—it’s called strategic planning.”
This mindset helps determine whether you should be investing personally, through a corporation, or via a trust. It also shapes your decisions in how gains will be realized and how wealth will be transferred. Understanding your destination allows you to choose the right tax roads to get there—avoiding unnecessary detours, penalties, or lost exemptions.
4. Your Investment Vehicle Matters
Angel investors often face choices between equity, convertible notes (like SAFEs), or debt instruments. While all of these can fuel early-stage companies, they come with different tax implications.
“Depending on how you want to address your investment—debt, equity, SAFEs—it may impact your tax strategy and where to put it,” Sapi explained. Equity might provide access to the Lifetime Capital Gains Exemption (LCGE) if structured properly. Debt instruments, on the other hand, may result in interest income, which is taxed at a higher rate. Convertible notes and SAFEs add another layer of complexity that can impact timing and classification of gains. The key is to align the investment vehicle not just with your risk appetite but also your tax planning framework. This will be discussed in detail later.
5. Make Use of Procedural Discipline
Even the best-designed structures can be undermined by poor procedural practices. Procedures refer to how funds move within and between your entities—how salaries are paid, how dividends are issued, and how capital gains are realized.
“Procedures are how you flow monies through the structure. If you don’t follow the rules, your tax strategy falls apart,” warned Sapi. Investors need to think carefully about how they receive returns. For instance, paying yourself via dividends versus salary can drastically affect your personal tax liability. Similarly, management fees or shareholder loans must be documented and executed properly to avoid audits or reclassifications.
6. Capital Gains Exemption and Strategic Planning
The landscape of capital gains taxation in Canada has seen significant developments that angel investors must understand. On January 31, 2025, the Government of Canada announced a change to the effective date for the capital gains inclusion rate increase – pushing it from June 25, 2024 to January 1, 2026.
This means the inclusion rate for 2024 and 2025 remains at 50%. This reversal came after strong opposition from business groups concerned about the economic impact.
The original Budget 2024 proposal would have increased the inclusion rate to 66.67% from 50% – meaning two-thirds rather than half of capital gains would be taxable. Under this plan:
- Corporations/trusts would pay 66.67% on all capital gains
- Individuals would pay 66.67% only on annual gains exceeding $250,000
The current 50% rate means investors still keep half their gains tax-free.
As Vaknin explained: “Even though Canada has some of the highest personal tax rates, individuals still benefit from the Lifetime Capital Gains Exemption.” She clarified the recent changes, noting: “The proposed capital gains inclusion rate increase didn’t go through—despite all the attention it received. The CRA has now pushed that decision to January 2026.”
Vaknin emphasized the current opportunity with the Lifetime Capital Gains Exemption (LCGE), which has increased to $1.25 million per individual. “If you invest in a startup and it eventually sells—and all the personal and corporate requirements are met—you can claim up to $1.25 million in tax-free capital gains,” she explained. However, she cautioned, “That exemption is for individuals only—corporations aren’t eligible.”
She further highlighted strategic uses of family trusts to maximize this benefit: “By using a family trust to hold shares in a qualifying startup, you could multiply that $1.25 million exemption—doubling, tripling, or even more depending on the structure.” However, she warned about their complexity: “Family trusts come with strict rules and limited flexibility—they’re highly situational and need careful planning.”
Regarding investment structures, Vaknin stressed the use of limited partnerships: “The main advantage is that losses from the startup can flow through the limited partnership to investors. You can then apply those losses against your regular income for tax relief.” This structure can be especially valuable in the early, high-risk stages of a startup, when losses are more likely. By allowing investors to offset these losses against other income, limited partnerships provide a financial cushion and make high-risk investments more attractive from a tax planning perspective.
When it comes to record-keeping, Vaknin noted, “People often think they only need to keep records for six or seven years—that only applies, however, to expenses. For capital investments, like startup shares, you need to keep documentation for the entire life of the investment—even if you sell it 25 years later.” Without proper records, you may face challenges proving the original cost of the investment, which could result in higher taxes when calculating capital gains at the time of sale. Keeping clear, long-term documentation is essential for protecting your tax position.
7. Loss Utilization
When a startup investment fails, many angel investors assume they can only claim a capital loss. But as Vaknin explained, there are three different ways to approach loss utilization—each with distinct tax implications—and one of them is often overlooked.
The first and most known option is a capital loss. If an investor sells shares for less than what they paid, the difference can be claimed as a capital loss, but these are limited to offsetting capital gains. Capital losses can be carried back three years or carried forward indefinitely, either personally or corporately. However, if the investor doesn’t have any capital gains to offset, the loss provides no immediate tax benefit.
The second option is for an investor who holds their position through a limited partnership. As stated earlier, in these structures, business losses incurred by the startup can flow through to the investors. This can provide significant tax relief, particularly when the startup fails early and generates no gains to offset. It’s a strategic structure that not only facilitates early-stage funding but can also mitigate downside risk through the tax system.
The third, and often overlooked, option is the Allowable Business Investment Loss (ABIL). This is not the same as a capital loss. ABIL allows investors to claim 50% of their loss against ordinary income, not just capital gains. That distinction makes ABIL far more flexible—and valuable—especially for investors who aren’t sitting on capital gains to offset. “ABIL is incredibly valuable because it lets you use the loss against your personal income—yet so many people don’t realize that’s even an option,” Vaknin emphasized.
To qualify for ABIL, the investment must be in the shares or debt of a Canadian-Controlled Private Corporation (CCPC). Furthermore, that corporation must qualify as a small business corporation, meaning that at least 90% of its assets must be used in active business. “Startups that fail usually qualify—their assets are almost entirely active, and there’s no leftover cash in the end,” she added. It’s important to note that ABIL is available only to individuals and not to corporations, and there are specific criteria that must be met at the time the loss is recognized.
Vaknin also stressed the importance of assessing eligibility before defaulting to a capital loss. “You must test whether ABIL applies before assuming it’s just a capital loss. Please consider situations where you’ve already used your Lifetime Capital Gains Exemption.”
If ABIL doesn’t apply, a regular capital loss can still be used—though it has limitations. Capital losses can only be applied against capital gains, not regular income. The upside? Capital losses don’t expire (unless you sell or amalgamate the corporation). You can carry them back three years to recover taxes from prior capital gains or carry them forward indefinitely.
8. Consider Available Tax Credits (When Applicable)
Although Ontario does not currently offer investor-specific tax credits like those in British Columbia, product-level tax incentives—particularly the Scientific Research and Experimental Development (SR&ED) program—can significantly improve a startup’s cash flow and stability.
Vaknin highlighted the SR&ED program as a key factor in investment decisions. “One of my clients has literally sustained itself and contributed the most to its cash flowthrough the SR&ED program every year for 25 years,” she shared. “They’ve received anywhere from $300,000 to $400,000 annually in refundable tax credits.”
For eligible Canadian-controlled private corporations (CCPCs), up to 43% of qualifying R&D expenditures—up to $3 million—can be refunded in cash. This includes a blended federal and Ontario rate. For example, if a startup spends $100,000 on eligible R&D in Canada, it could receive approximately $43,000 back in cash. “That’s not just a line item on paper—it’s real liquidity that helps extend runway, reduce burn, and increase long-term viability,” she stresses.
Vaknin explained, “From an investor perspective, you get better bang for your buck in a company that’s conducting SR&ED.” These are companies developing new technologies, processes, or methods—not necessarily inventing brand-new products, but improving how things are done. She illustrated this with this example: “We’ve had toothpaste and toothpaste tubes for decades, however, if a company develops a new way to get the toothpaste into the tube, that qualifies for SR&ED.”
There are two important caveats:
- Eligible expenditures must be conducted in Canada. Work done abroad—such as testing or consulting with a contractor in the U.S.—does not qualify.
- Not all expenses are refundable. Non-qualifying expenditures can still be carried back three years or forward twenty years, but they don’t generate immediate cash returns.
For investors, evaluating whether a startup is tapping into SR&ED can reveal how well they’re managing cash flow and whether they’re positioned to take advantage of Canada’s generous R&D tax environment. This doesn’t just benefit the company—it strengthens the likelihood of successful outcomes for everyone involved.
9. Exit Strategies and Tax Considerations for Investors
Exit strategies are a key consideration for any investor, especially when planning for long-term returns and managing tax obligations. Whether through an acquisition, merger or an IPO, it’s important to understand the tax implications of capital gains and how to optimize them.
When a startup is sold, investors typically realize a capital gain. As Vaknin explained, “The inclusion rate is still 50%. So, if you invested $500,000 and your shares sell for $1 million, that’s a $500,000 gain—and $250,000 of that is taxable.” While the capital gains tax rate is standard, investors may be eligible for the Lifetime Capital Gains Exemption. “It’s a once-in-a-lifetime exemption,” she emphasized. “It only applies to qualifying shares of a Canadian-controlled private corporation. You can only claim it when you sell shares—not assets.”
Vaknin shared an example that highlights how critical timing can be, especially in the context of an IPO. “A client of mine issued shares to several family members in anticipation of a public offering. The IPO went through, and we claimed the capital gains exemption for the entire family. But just two months later, the stock plummeted. At that point, the exemption had been used, and they were unable to reverse course.” Her message to investors is clear: “Before you claim your lifetime exemption, especially in an IPO scenario, do your due diligence to determine the likelihood that the company can perform post IPO. If the stock underperforms, you’ve lost the opportunity—and you don’t get a second chance.”
Mergers and acquisitions are another common exit path. “If a startup is acquired, investors may realize capital gains or use their exemption,” Vaknin noted. However, many recent deals involve U.S. companies buying Canadian startups, which limits tax deferral options. “If the acquiring company is American, you either pay tax or claim your LCGE. There’s no option to defer the gain. That deferral mechanism only works with Canadian buyers.”
On the other hand, if the acquirer is Canadian and offers shares instead of cash, investors have more flexibility. “If a Canadian company offers you shares in exchange, you can either pay tax on the gain or defer it by filing what’s called a Section 85 election,” Vaknin explained. “This lets you do a share-for-share exchange and postpone the capital gain until you sell the new shares.” Alternatively, she added, “You can choose to use your lifetime capital gains exemption at that time, which resets the cost of your new shares up to the LCGE limit.”
The 2024 federal budget has proposed to increase the LCGE to $1.25 million for dispositions occurring on or after June 25, 2024, with indexing to inflation going forward. For individuals who have already used their exemption in the past, this change creates an opportunity to realize additional tax-free capital gains on future sales of qualifying property.
10. Work with Trusted Advisors
Both speakers concluded by reinforcing the importance of integrated legal and accounting support. “At the end of the day, tax planning is about wealth preservation and transfer. You want to avoid pitfalls and get advice tailored to your personal circumstances,” Vaknin advised.
Investing without professional support can lead to avoidable tax events, missed exemptions, and inefficient wealth structures. Vaknin, who has spent years advising on M&A, reorganizations, and tax planning, encouraged angel investors to approach tax not as a one-time consultation but as an ongoing strategic partnership.
Tax strategy isn’t just for high-net-worth individuals or Fortune 500 CFOs—it’s an essential tool for every angel investor. Whether you’re just beginning your investment journey or refining your portfolio, the lessons from this Brampton Angels session are clear: structure early, plan smart, and seek professional guidance.
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