Before pausing for the summer, Parliament passed Bill C-59, the Fall Economic Statement Implementation Act, which included changes to how businesses, fisheries and farms are transferred within families.UlyssePixel/iStockPhoto / Getty Images
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Legislative changes to how family businesses are passed to the next generation clear up some ambiguity in tax law, but may also complicate transfers and cost the parties involved more money, experts say.
In June, Parliament passed Bill C-59, the Fall Economic Statement Implementation Act, which included changes to how businesses, fisheries and farms are transferred within families.
The changes to these intergenerational business transfers – such as passing down the family farm – came about because it was more advantageous under the previous rules, from a tax perspective, to sell to a third party than to keep businesses within the family, says Michelle Connolly, head of financial planning and insurance solutions at Raymond James Ltd. in Toronto.
Provisions within the Income Tax Act made it “tax punitive to transfer to the next generation,” she says, “in some provinces, upward of 20 per cent.”
In 2021, Manitoba Conservative MP Larry Maguire introduced a private member’s bill, C-208, to treat intergenerational transfers similarly to sales to a third party.
“But there were some problems with the original legislation drafted,” Ms. Connolly says. “Notably, it allowed for surplus stripping to still occur, in the absence of a true authentic transaction.”
Surplus stripping is a tax strategy that allows a business owner to distribute cash from a corporation as a capital gain instead of as dividends – and to benefit from the lower tax rate afforded to capital gains – without a genuine transfer of the business.
The changes to Bill C-208, passed last month in Bill C-59, ensure the intergenerational transfer is an authentic business transaction. The legislation also introduced more qualifications to be met by the seller.
Ms. Connolly says the current legislation “is a lot more clear.” It opens up access to the lifetime capital gains exemption, which increased to $1.25-million in the 2024 federal budget on qualified business corporation shares and qualified farm and fishing property, she adds.
These changes may prompt a much-needed conversation about succession, she says, which is particularly important to the farming industry.
Succession planning for family farms is a rarity, as 88 per cent of Canada’s farms don’t have a written succession plan, according to the Canadian Bar Association, even though $53-billion in farmland is set to transfer ownership within the next decade.
Although organizations that work with family businesses, including the Canadian Federation of Independent Business (CFIB), laud Bill C-208, there is concern that the more than 10 tests now required to meet the definition of a genuine family transfer will make these transactions too complex.
“The amendments that were introduced do not put family transfer at a fiscal disadvantage, so the spirit of Bill C-208 remained in the amendment,” says Jasmin Guénette, vice-president of national affairs at the CFIB. “But they do make it more complicated and burdensome.”
For example, the amendments propose two avenues for family business transfers: immediate, in which the timeline to hand over the business fully is 36 months; and gradual, in which the parties have between five and 10 years to make the transition. Both options require the child to maintain control of the business for a period of at least 36 months for it to be considered a genuine sale. In these cases, the “child” can refer to a niece or nephew as well.
The rules are specific and detailed, which on the one hand makes for less ambiguity and on the other allows for errors to occur if the right experts are not employed to aid in the transfer.
While Mr. Guénette says this level of complexity will not likely affect a business owner’s decision to pass down the family business, it may make it more expensive.
“It could be that the transaction takes more time, or is more costly or a bit more complicated, because of all the steps and the tests that businesses have to pass,” he says.
Clara Pham, tax partner at RSM Canada and leader of its national tax centre, says some of the confusion around the changes relates to who is in control of, or managing, the company during those 36 months.
In the case of both immediate and gradual intergenerational business transfers, for de jure control (meaning voting shares), there has to be an immediate transfer of the majority of the controlling shares, “so 50 per cent plus 0.1 per cent,” Ms. Pham says.
However, concerning de facto control, which refers to any form of control over the company, such as influence, only the immediate transfer requires the parents to relinquish factual control on transfer. Also, the parents (seller) are required to hand over the management of the business to their child (buyer) within 36 months for the immediate transfer and 60 months for the gradual transfer.
“It all depends on what regime you choose,” Ms. Pham says.
The big takeaway for those looking at an intergenerational business transfer is the devil’s in the details.
“On one hand, we have this newer, more detailed set of rules that will give us some certainty on how to proceed. But yes, because it’s more detailed, it’s more complex,” Ms. Pham says. “Inevitably, that just means taxpayers will have to rely on advisors a bit more to make sure they’re doing the right thing.”
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