New rules for taxing intergenerational transfers: a major gain for small businesses

October 15th, 2021

This article first appeared in French in the September 2021 issue of the Journal des Parcs industriels of the Corporation des parcs industriels du Québec.

Bill C-208 – An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation) received Royal Assent on June 29 and the amendments came into force the same day.

The new rules address a long-standing problem: it used to be more financially advantageous to sell one’s business, farm or fishing operation to a third party at arm’s length, rather than pass it on to the next generation.

Business succession is a major issue for Quebec SMEs. This legislative amendment is a step in the right direction to facilitate the continuation of a family business by a successor related to the transferor.


Businesses that will benefit from the new rules 

The conditions to benefit from the new rules can be summarized as follows:

  • the taxable capital of the business does not exceed $15 million (the capital gains deduction mentioned below will be gradually reduced from $10 million);
  • the shares transferred are eligible small business shares or shares of a family farm or fishing corporation;
  • the business will be controlled by one or more children or grandchildren, who must be at least 18 years of age; and
  • the successor of the business must not dispose of these shares within sixty months of their purchase, except in the event of death.


Implications for affected businesses 

Thus, intergenerational business transfers are now exempt from the application of the anti-avoidance rule in section 84.1 of the Income Tax Act (“ITA”). From now on, rather than the sale price being considered a dividend for the transferor, the transferor will be able to benefit from a capital gains exemption.

In addition, the amendment to the ITA also broadens the concept of related persons, such that siblings are now deemed to be related. This amendment will certainly facilitate the reorganization of sibling-owned corporations, a process that was often complex and costly under the previous legislation.

It should be noted that these measures differ from those already established by the Quebec government. Until the measures are aligned between the different levels of government, each transaction will have to be analyzed individually.


Future changes

In her July 19 press release, Chrystia Freeland, Deputy Prime Minister and Minister of Finance, indicated that upcoming legislative changes will ensure that the law is not used for artificial tax planning purposes. Issues that these changes will likely address include the investments or capital contributions that the child or grandchild will be required to make; the level of their interest in the business following the transfer; and the obligations and timelines that must be met in connection with the transfer of the parent’s interest in the business.

We will be closely following the developments related to these amendments. In the meantime, please do not hesitate to contact a member of our team if you have any questions or concerns about these legislative changes.

The authors would like to thank Joanie Baker, articling student, for her assistance in drafting this article.