How does business succession work in Quebec?

Two bodies of Quebec law bear on business succession. The Civil Code of Québec sets rules for an enterprise when its owner dies: how a will describes it, whether it can be kept together among several heirs, and which heir has a preference to be allotted it. The Taxation Act (Quebec) sets conditions under which a sale of shares during life to a corporation controlled by the seller’s children is treated as made at arm’s length. This page covers Quebec only, and it is general information, not advice on your own file. If you are planning a handover, it helps to know which of the two routes you are on, because different articles and sections apply to each.

What the Civil Code says about a bequeathed enterprise

Under the Civil Code of Québec, art. 746, the legacy of an enterprise is presumed to include operations acquired or created after the will was signed which, at the time of death, form an economic unit with the bequeathed enterprise. In practical terms, a will that names “the business” may reach a branch or division added years later, which is why a will signed long ago deserves a re-read when the business has changed. Whether a particular operation forms an economic unit is a question for the notary or lawyer drafting or interpreting the will.

Keeping the enterprise together after a death

Despite an application for partition, the Civil Code allows indivision to be maintained in respect of a family enterprise that the deceased had operated, or of the shares or other securities connected with it where the deceased was the principal partner or shareholder (art. 839). An heir who before the death actively participated in the operation of the enterprise, or lived in the family residence, may apply to the court for the maintenance of the indivision (art. 841). In deciding, the court takes into account the testamentary provisions, the interests involved and the means of livelihood the family and the heirs derive from the undivided property, and in all cases the agreements among the partners or shareholders to which the deceased was a party are respected (art. 842). Maintenance takes place on the conditions the court fixes and may not be granted for more than five years except with the agreement of all the interested persons; it may be renewed until the death of the deceased’s married, civil union or parental union spouse or until the majority of the deceased’s youngest child (art. 844). The court may order partition where the causes that justified maintenance have ceased or indivision has become intolerable or presents great risks for the heirs (art. 845).

Dividing a succession without breaking up the business

When shares of a succession are composed for partition, the Civil Code says that immovables should not be parcelled and enterprises should not be divided up, and any inequality in the value of the shares is compensated by an equalizing sum (art. 852). Under art. 858, despite any objection or application for an allotment by preference by another co-partitioner, the enterprise, or the shares or other securities connected with it, are allotted by preference to the heir who was actively participating in its operation at the time of the death. If several heirs assert the same right of preference, or an application for an allotment is contested, art. 859 settles the contestation by a drawing of lots or, where it concerns the enterprise or its connected securities, by the court, which takes account of, among other things, the interests involved, each party’s reasons for the preference and the degree of their participation in the enterprise. If you are an heir who works in the business, ask a Quebec notary or lawyer how these articles apply to the shares you hold.

Transferring to a child during your life

The Taxation Act (Quebec), Division III on intergenerational business transfers, deals with a disposition of shares by a taxpayer to a purchaser corporation. Under s. 517.5.13, if its conditions are met, s. 517.5.2.1 applies and the taxpayer and the purchaser corporation are deemed to deal with each other at arm’s length at the time of the disposition. The conditions include that, at the disposition time, the taxpayer is an individual other than a trust, the purchaser corporation is controlled by one or more of the taxpayer’s children who meet the Act’s minimum age, and the shares are qualified small business corporation shares or shares of a family farm or fishing corporation. They also include that, subject to s. 517.5.12, from the disposition time until 36 months after it the child or group of children controls the purchaser corporation, and that the taxpayer and the taxpayer’s spouse take reasonable steps, within 36 months or such greater period as is reasonable in the circumstances, to transfer management of each relevant business to the child or a member of the group and to permanently cease managing it. The taxpayer and the child, or each child in the group, must also have made a valid joint election under subparagraph i of paragraph h of subsection 2.31 of s. 84.1 of the federal Income Tax Act. Section 517.5.14 sets out a separate list of conditions. Section 517.5.12 gives “child” the meaning in s. 451 and also includes a niece or nephew, a niece’s or nephew’s spouse and a niece’s or nephew’s child. Ask an advisor whether your shares and your purchaser meet every condition.

How the federal rule fits in

Section 84.1 of the federal Income Tax Act applies where a taxpayer resident in Canada (other than a corporation) disposes of shares that are capital property, of a corporation resident in Canada, to another corporation with which the taxpayer does not deal at arm’s length and, immediately after, the two corporations would be connected; it then reduces paid-up capital where new shares are issued as consideration and can deem a dividend to be paid to the taxpayer. Where s. 84.1(2.31) or (2.32) applies, s. 84.1(2)(e) deems the taxpayer and the purchaser corporation to deal with each other at arm’s length. The Quebec rule is tied to the federal election under s. 84.1(2.31), but its conditions are set out separately in the Taxation Act, so check each set on its own. The Canada Revenue Agency’s capital gains deduction page (line 25400) lists dispositions of qualified small business corporation shares among the gains that may be eligible for that deduction.

Questions to put to your Quebec advisors

• Does the will’s description of the enterprise match what the business is today, given art. 746 on operations added after signing?
• Does any shareholder or partner agreement bind the heirs, and has it been read next to the Civil Code articles on indivision?
• Which heir will be actively participating in operating the enterprise at the time of death, and is that recorded anywhere?
• If you plan a sale to a child’s corporation, can each condition of Taxation Act s. 517.5.13 be met, and who will track the 36-month periods?
• Is the federal election under Income Tax Act s. 84.1(2.31) being prepared together with the Quebec one?

For a wider view of family handovers across Canada, read how succession works for a family business in Canada. Quebec’s own rules begin with the Civil Code and the Taxation Act.