How do I sell my business to a family member?

Selling to a son, daughter, sibling or other relative is allowed, but the tax rules treat it differently from a sale to a stranger. The Income Tax Act deems related persons not to deal at arm’s length, and several of its rules then look at fair market value instead of the price you agreed. Much of the work may be settling the price, the structure and the paperwork.

Who counts as related

Section 251 of the Income Tax Act treats individuals connected by blood relationship, marriage, common-law partnership or adoption as related. Blood relationship covers a child or other descendant and a brother or sister, while marriage and common-law partnership extend the group to spouses and in-laws. A corporation controlled by one of those relatives is related to you too. Others, such as a cousin, are a question of fact.

Why the price matters

If you dispose of something to a person you do not deal with at arm’s length for less than its fair market value, section 69 of the Act deems you, except as the Act otherwise provides, to have received proceeds of disposition equal to fair market value. A family discount therefore does not, in general, reduce the proceeds the Act counts. Get a supportable valuation before you fix the price, and read how to value a business for a family transfer for the approach.

Choosing what is sold

A sole proprietorship is legally tied to one individual, and the Canada Revenue Agency says a new owner cannot continue using the old business number. For a corporation, changes to owners must be updated with the incorporating authority before you send documents to the CRA. If your relative buys the shares through their own company, section 84.1 can treat part of the price as a dividend, subject to its conditions and its exceptions for some intergenerational transfers; selling shares to your own holding company shows how that rule works.

Putting it in writing

BDC says an accountant can help structure the transaction to minimize tax, and it lists a family advisor, who helps family-owned businesses with succession planning. Decide the price basis, the payment schedule and your role after closing before the paperwork starts, and weigh the choice in passing the business on versus selling it.