How does succession work for a family business in Canada?

Passing a business to the next generation is not one event. It is a leadership handover and an ownership transfer, and the two can happen on different timelines. BDC defines succession planning as the process of preparing successors for key roles so disruption is minimized during leadership changes. This guide, for the owner of a family business, explains the pieces in plain terms: who runs the business, how ownership moves, and which tax rules CRA says apply to transfers within a family. It is not a plan for your business, and the tax steps need an adviser who has seen your numbers.

How common family succession is, and how prepared owners are

The Canadian Federation of Independent Business reports that family succession remains common, with owners planning a family sale and others planning a family transfer. It also reports that formal succession planning remains uncommon, that finding suitable successors remains the most significant barrier, and that many owners face challenges navigating complex financial, legal, tax and valuation considerations. Those findings are a reason to start early, not a prediction about any one family.

Preparing the successor to run it

BDC says advance planning gives you time to identify who will take on the role and ensure they have the necessary skills and training, and that a successor can meet key clients and help them stay loyal to the company. Its process starts by identifying the key customers, suppliers and other relationships that need to be maintained, then looks for gaps between the future and current states, including missing skills in a designated successor. BDC adds that taking on this exercise several years before a departure allows enough time to prepare the successor and do the hand-off in phases. BDC also has a section on choosing who takes over a family business, which is worth reading before the family discusses it.

A family sale or a family transfer

CFIB counts a family sale and a family transfer separately. If a family member is paying for the business, possibly over time, ask how the payments will be secured. If ownership is passing without full payment, ask what happens to your own retirement income. Either route is a legal and tax event, so a lawyer should draft it and an accountant should model it. Whether incorporation helps is covered in our answer on how incorporating a family business helps with share succession.

The capital gains reserve for a child

CRA says that when you receive the proceeds over a number of years, you may be able to claim a reserve. Generally, the maximum period for most reserves is four years, so the gain is included in income over five years. CRA says a nine-year reserve period, with the gain included over 10 years, is provided for transfers to your child of qualified small business corporation shares. CRA says your children, for these reserves, include a grandchild, a great-grandchild and a child’s spouse or common-law partner. Only for intergenerational business transfers, CRA adds a niece or nephew of you or your spouse, the spouse of such a niece or nephew, and a child of such a niece or nephew. CRA also says a capital gain from a reserve brought into income qualifies for the capital gains deduction only if the original capital gain was from a property eligible for the deduction. The reserve has conditions, so confirm eligibility first.

Intergenerational business transfers

CRA’s capital gains guide describes an intergenerational business transfer as one where, provided certain conditions are met, the transferor disposes of qualified small business corporation shares (or family farm or fishing corporation shares) to a corporation controlled by one or more persons, each of whom is an adult child of the transferor. The Income Tax Act has separate provisions for an immediate and a gradual transfer, and CRA points to Form T2066, an election for either. The conditions are detailed, so an adviser should test them against your facts before any sale agreement is signed.

Keeping family and business apart

BDC’s succession advice includes a section on separating business from family, and another on why making the right choice of successor matters more than fairness. Put into practice, that means deciding on paper which relatives will work in the business, which will only own shares, and how each will be paid. Ask how a disagreement between owners would be settled, and what happens to a relative’s shares if they leave, divorce or die. A buy-sell agreement is one document that can address that, and our answer on how a buy-sell agreement works in a family business explains it.

• Name the role each family member would hold, and what skills are missing.
• Decide with the family whether ownership will be sold or transferred.
• Ask your accountant whether the shares are qualified small business corporation shares.
• Ask whether a reserve or an intergenerational transfer election could apply.
• Write the plan down with a lawyer, including what happens if a successor leaves.