How do I transfer my business to the next generation?

Passing a business to the next generation raises several separate questions: how ownership will move, how the tax rules apply, how the successor will pay, and whether any licences have to move to the new owner. BDC says a lot of people underestimate how long it takes to prepare a business for sale.

Choose how ownership moves

One route is a sale to the successor. Another is a reorganization such as an estate freeze, which moves future growth to others without a sale; see how an estate freeze works. BDC lists vendor financing, an earn-out and a phased transfer of ownership as ways for an owner to remain involved with the company after a sale.

Check the tax rules for family transfers

The Income Tax Act contains a section headed “Non-arm’s length sale of shares” and further provisions headed “Immediate intergenerational business transfer” and “Gradual intergenerational business transfer”, each with its own conditions. The CRA’s capital gains deduction page also points to a separate line, 25395, for a qualifying business transfer. An accountant should apply those conditions before the price or structure is agreed.

Plan the financing

A successor who cannot pay the whole price at closing has options. BDC offers a business purchase or transfer loan that it says can help a buyer take over a family business, and it asks applicants to have a clear transaction structure, an agreed price, a letter of intent and an expected closing date. If the owner finances part of the price, the CRA says a capital gains reserve may let the gain be reported as the money is received.

Check licences and approvals

Some businesses cannot be handed over without a regulator’s involvement. In British Columbia, for example, the Liquor and Cannabis Regulation Branch says that when a business changes ownership its liquor licence must be transferred, that the current licensee starts the transfer, and that the buyer must then complete the application. Other regulated businesses may have their own rules, so check the regulator in the province concerned.