Tax Breaks for Family Business Transfers

Summary#

This bill changes Canada’s Income Tax Act to make it easier to transfer a small business, family farm, or fishing corporation to adult children or grandchildren. It creates an exception to an anti-avoidance rule so the sale can be taxed as a capital gain, not a dividend, if certain conditions are met. It also treats siblings as related in specific cases to block a tax-planning route using sibling-owned companies.

• Allows parents or grandparents to sell shares to a corporation controlled by their adult children or grandchildren and be treated as dealing “at arm’s length” (Bill s.84.1(2)(e)).
• Requires the buyer corporation to keep the shares for at least 60 months, with clawback rules if it sells earlier (Bill s.84.1(2.3)(a)).
• Phases out the lifetime capital gains exemption (LCGE) for larger companies with taxable capital in Canada over $10 million, and eliminates it over $15 million (Bill s.84.1(2.3)(b); ITA s.110.6).
• Requires an independent share valuation and an affidavit to support the transfer (Bill s.84.1(2.3)(c)).
• Treats siblings as related for certain transactions involving small business, farm, or fishing corporations, closing a planning gap (Bill s.55(5)(e)(i)).

What it means for you#

• Households (owners of small businesses, family farms, fishing corporations)

  • You can sell your company’s shares to a corporation controlled by your child or grandchild age 18+ and have the sale taxed as a capital gain, not a dividend, if the buyer corporation holds the shares for 60 months (Bill s.84.1(2)(e), s.84.1(2.3)(a)).
  • You may be able to use the lifetime capital gains exemption (LCGE) on the sale, but it is reduced for companies with taxable capital in Canada between $10 million and $15 million and is eliminated above $15 million (Bill s.84.1(2.3)(b); ITA s.110.6).
  • You must obtain an independent fair market value assessment and sign an affidavit with a third party to confirm the sale (Bill s.84.1(2.3)(c)).
  • If the buyer corporation sells the shares within 60 months (other than due to death), the exception is cancelled and the sale is recharacterized, which can increase tax (Bill s.84.1(2.3)(a)).

• Adult children and grandchildren (18+)

  • You must control the purchaser corporation to meet the exception (Bill s.84.1(2)(e)).
  • You need to hold the acquired shares in the purchaser corporation for 60 months to avoid a clawback (Bill s.84.1(2.3)(a)).

• Siblings who own corporations

  • For certain transactions involving small business, farm, or fishing corporations, siblings are treated as related and not at arm’s length. This limits the ability to use sibling-owned companies to reduce tax through certain dividend strategies (Bill s.55(5)(e)(i)).

• Tax and legal advisors

  • You will need to document control by children/grandchildren, the 60‑month holding period plan, the independent valuation, and the required affidavit (Bill s.84.1(2)(e), s.84.1(2.3)(a)-(c)).

Expenses#

Estimated net cost: Data unavailable.

• No official fiscal note identified. The bill does not appropriate funds; it changes tax treatment (Data unavailable).
• Likely revenue effects:
  • Lower federal personal income tax when intergenerational sales qualify for capital gains treatment and LCGE instead of dividend treatment (Bill s.84.1(2)(e); ITA s.110.6). Data unavailable.
  • Offset factors include the 60‑month hold/clawback, LCGE phase‑out for larger firms, and the sibling rule that limits certain avoidance strategies (Bill s.84.1(2.3), s.55(5)(e)(i)). Data unavailable.
• Administrative impacts for the Canada Revenue Agency to review valuations and affidavits. Data unavailable.

Proponents' View#

• Levels the playing field so selling to a child is not taxed more harshly than selling to an unrelated buyer, by allowing capital gains treatment and potential LCGE (Bill s.84.1(2)(e); ITA s.110.6).
• Helps keep family businesses, farms, and fishing operations intact through intergenerational transfers, supporting continuity of local jobs and services (Bill s.84.1(2)(e)).
• Includes safeguards against abuse: a 60‑month holding period with a clawback if breached (Bill s.84.1(2.3)(a)).
• Targets relief to genuinely small and mid‑sized firms by phasing out the LCGE for firms with over $10 million in taxable capital and eliminating it above $15 million (Bill s.84.1(2.3)(b)).
• Improves tax integrity by treating siblings as related in relevant transactions, closing a loophole that enabled certain surplus‑stripping plans using sibling‑owned companies (Bill s.55(5)(e)(i)).

Opponents' View#

• Creates risk of “surplus stripping” (turning what would be dividends into capital gains taxed at lower rates) if families structure control to meet the child/grandchild test without a true transfer of the business’s management or risk (Bill s.84.1(2)(e)).
• The 60‑month hold may not fully prevent avoidance; families could plan to hold for the minimum period and then sell, reducing tax without long‑term succession (Bill s.84.1(2.3)(a)). Assumption flagged.
• Requires independent valuations and affidavits, adding compliance costs and potential disputes over fair market value (Bill s.84.1(2.3)(c)).
• Reduces federal tax revenue when used; no published estimate to gauge the size of the impact (Data unavailable).
• Complexity remains high: rules rely on definitions like “qualified small business corporation share” and “taxable capital,” which may be hard for small operators to navigate without professional help (Bill s.84.1(2)(e); ITA s.110.6(1)).