Can I transfer my business to my children?

Passing a business to the next generation is the most common succession plan among Canadian owners and one of the least often documented. It is entirely possible to do, but the tax rules treat family transactions differently from arm’s-length ones, and the differences catch people out. The starting point is that you generally cannot avoid tax simply by selling cheaply to a family member.

Fair market value applies even if you charge less

Where you transfer shares or property to a person you do not deal with at arm’s length for less than fair market value, you are generally treated as having received fair market value proceeds anyway. Worse, in some cases the recipient’s cost is set at what they actually paid, which can produce double taxation on the same value. Selling to your child at a discount without advice can therefore be more expensive than selling at full price. A proper valuation is the foundation of any family transfer.

The intergenerational transfer rules

Historically, an owner who sold shares to a corporation controlled by their own child could have the proceeds recharacterized as a dividend rather than a capital gain, denying the lifetime capital gains exemption — a result they would have avoided by selling to an unrelated buyer. Amendments introduced relief for genuine transfers, with conditions covering the transfer of legal and factual control, the child’s meaningful involvement in the business, and timelines that differ for immediate and gradual transfers. The conditions are detailed and must be met and documented; joint elections are typically required.

Other tools and other issues

• An estate freeze can lock your value at today’s amount and pass future growth to children or a family trust, spreading tax and potentially multiplying access to the exemption where conditions are met.
• Certain rollovers permit tax-deferred transfers of qualifying farm or fishing property to a child, on their own conditions.
• Tax on split income rules can apply to dividends paid to family members who are not sufficiently involved in the business.
• Financing matters: a child who cannot pay usually needs a vendor take-back, which brings its own reserve and security questions.
• Family dynamics need addressing directly — children not entering the business, fairness between siblings, and what happens if the successor leaves.

Start early and write it down

Intergenerational transfers benefit more from lead time than almost any other structure, because the relief conditions look at control and involvement over defined periods. Build the plan with an accountant and a lawyer together, document the valuation, and record the arrangement in a shareholders’ agreement rather than a conversation at the kitchen table.