Introduction
The early days of a tech startup are characterised by a certain useful informality — decisions are fast, processes are lean, and tax compliance is largely confined to filing a T2 and paying HST. As the company grows — hiring its first employees, onboarding its first enterprise customers, closing its first financing round — the tax obligations multiply. The founders who do not notice the change until the CRA notices it for them face the most costly consequences.
Mistake 1: Continuing to Treat All Workers as Contractors
A founding team of three co-founders hiring their first developers often brings them on as contractors — it is faster, simpler, and avoids the payroll setup overhead. In the early days, where the developers are working on discrete projects with their own tools and genuine independence, this characterisation may be defensible.
As the company grows to ten, twenty, or thirty people, many of those "contractors" are attending stand-ups, working in the company's tools, following product roadmap direction, and working exclusively for this company for years on end. The contractor characterisation is no longer defensible — and the retroactive payroll liability exposure grows with every month.
Fix: Review every contractor relationship that has lasted more than six months and apply the CRA's employment test honestly. Transition those who are functionally employees to employee status proactively, before the CRA's classification audit does it retroactively.
Mistake 2: Missing the SR&ED Filing Window
Canadian tech companies that are performing qualifying research and development activities can claim the SR&ED credit — 35% refundable for CCPCs on the first $3 million of qualifying expenditures. For a company spending $500,000 annually on engineering, this is a $175,000 annual refund.
The SR&ED claim must be filed within 18 months of the corporation's fiscal year end. Founders who discover SR&ED exists in year three — after two years of qualifying work — cannot retroactively claim those missed credits. The window is absolute.
Fix: Identify whether qualifying activities exist from the first year of development work. Engage a CPA with SR&ED experience before the first fiscal year closes.
Mistake 3: Issuing Options Without a Documented FMV
As discussed in Article 48 (CCPC stock options) and Article 93 (US employees), issuing options requires a documented fair market value at the time of grant. For Canadian CCPC options, the exercise price must be at or above FMV to access the 50% stock option deduction. For US employees, the 409A valuation requirement is a compliance obligation.
Many founders issue options to early employees at a nominal price — $0.01 per share, for example — without documenting a FMV analysis. If the actual FMV at grant was higher, the exercise price is below FMV, and the option does not qualify for preferential treatment.
Fix: Document a supportable FMV analysis at each option grant date. For early-stage companies with no external financing, this can be a simple internal analysis. As the company matures and valuations increase, a formal valuation is more appropriate.
Mistake 4: Letting the CCPC Status Erode With Each Financing Round
Every time a Canadian tech company raises capital from foreign investors, there is a CCPC status risk. A corporation that is controlled by non-residents is not a CCPC — and loses the SR&ED refundable credit, the small business deduction, and the LCGE on a future exit.
Founders who have raised multiple rounds from US-based VCs without reviewing their CCPC status after each round may have unknowingly lost the CCPC designation — forfeiting credits and deductions they assumed were still available.
Fix: After every significant financing round, have a CPA confirm the CCPC status of the corporation. The control analysis is specific and depends on the shareholder register, voting rights, and board composition.
Mistake 5: Not Tracking the ACB of Founder Shares
As discussed in Articles 60 and 92, the ACB of shares determines the capital gain on a future sale. For founders who received shares at nominal cost at incorporation, the ACB may be very low — and the capital gain on a $5M acquisition is almost the full $5M.
Founders who have undergone a section 85 rollover, received shares as part of a reorganisation, or experienced multiple share issuances across financing rounds may have a complex ACB history. Not tracking it means the gain is calculated incorrectly at exit — often in the CRA's favour.
Fix: Maintain an ACB schedule for founder shares from day one, updated with every share issuance, reorganisation, and financing event. Your CPA should be tracking this as a matter of course.
When to Speak With a CPA
For growth-stage founders who have not had a specific tax review since the company was formed, the list above is a useful starting checklist. Each of these errors has a remediation path when caught early — and a significantly higher cost when caught by the CRA.