Can I switch to family succession after planning an outside sale?

You can change direction if nothing you signed stops you, so the first step is to read it. Ask your advisors which parts of the preparation for an outside sale, such as clean financials and a summary of the business, can be reused for a family transfer. What can stand in the way is a signed document (a family sale has its own steps), and a family sale is taxed under different rules from a sale to a stranger.

Check what you have signed

BDC explains that a confidentiality agreement very often comes before a letter of intent, that a letter of intent can give a buyer a period of exclusivity during which the buyer negotiates, and that where it so provides, it creates binding obligations, particularly on confidentiality and exclusivity. If you signed one, confirm whether exclusivity is in force, whether it binds you, and how it can end. Keep honouring any confidentiality terms about information the outside buyer shared.

A sale to a related person is not at arm’s length

Under Income Tax Act s.251, related persons, including a child or other descendant, are deemed not to deal with each other at arm’s length. Section 69 says that, except as expressly otherwise provided, a taxpayer who disposes of property to a non-arm’s length person for no proceeds, or proceeds below fair market value, or by way of gift, is deemed to have received proceeds equal to that fair market value. A person who acquires property from a non-arm’s length person for more than fair market value is deemed to have acquired it at that value. A price set for family reasons therefore needs tax advice.

Payments over time

A family transfer can be paid over years. The CRA says a seller who receives the proceeds over a number of years may be able to claim a capital gains reserve, reporting part of the gain later by reference to proceeds not yet received. It also describes a nine-year reserve period for certain transfers to a child, including family farm or fishing property and qualified small business corporation shares, under conditions. Whether your sale qualifies depends on the facts.

Tell the other side at the right time

Before you drop the outside process, ask your lawyer how to give notice and whether any break fees or tail periods apply. Do not assume the buyer will let a signed process lapse quietly.