How does incorporating a family business help with share succession?

A sole proprietorship has no shares to pass on. Incorporating creates them. Corporations Canada explains that a shareholder can transfer shares and the rights that go with them, so ownership can move in parts rather than as one lump. Transfers must conform to any restrictions that apply to the corporation’s shares, for example a requirement that directors approve each transfer. A corporation formed under a provincial statute follows that province’s rules, so confirm which law governs yours.

Shares can be divided and given different rights

Corporations Canada notes that the articles can provide for more than one class of shares. Under CBCA s.24, the rights to vote, to receive dividends and to receive the remaining property on dissolution must each attach to at least one class, but they need not all sit in one class. A family can therefore write the terms of each class into the articles and decide who holds which. A corporation with a single class gives all its holders equal rights.

Moving an existing business into the corporation

If the owner already runs the business personally, its property must be transferred to the new corporation. Income Tax Act s.85 lets a taxpayer and a taxable Canadian corporation jointly elect, in prescribed form, an agreed amount for eligible property transferred for consideration that includes shares. The Act caps and floors that amount in several ways, so the election is not automatic and the result is not simply tax-free. Have an accountant model it first.

Passing the shares to the next generation

If an individual resident in Canada disposes of shares of a Canadian-resident corporation, held as capital property, to another corporation with which the individual does not deal at arm’s length, and immediately afterwards the two corporations would be connected, ITA s.84.1 can reduce paid-up capital and deem a dividend. Sections 84.1(2.31) and (2.32) provide intergenerational business transfer exceptions with conditions, including that a child aged 18 or older controls the purchaser corporation, 36-month tests and a joint election. CRA also describes a nine-year capital gains reserve period for certain transfers to a child, such as qualified small business corporation shares. Each condition has to be met, so confirm them before signing anything.