Key intergenerational business transfer tactics for a successful succession

Not every family transfer qualifies under IBT rules. Businesses should confirm that the transaction meets the following requirements before planning begins:

• Seller eligibility: The seller (parent) must be an individual other than a trust who has not previously claimed an exception under section 84.1(1). This ensures the rules apply only to genuine succession transactions, not repeated surplus-stripping attempts.

• Type of shares: The shares being transferred must be either qualified small business corporation (QSBC) shares or shares of a family farm or fishing corporation (FFFC).

• Purchaser control: The purchasing corporation must be controlled by one or more of the seller’s childrenⁱ and each child must be at least 18 years old. For the purposes of IBT rules, nieces, nephews, grandnieces and grandnephews also qualify.

Amendments to IBT regulations, effective Jan. 1, 2024, provide two pathways for transfers, subject to certain conditions outlined in the Income Tax Actⁱⁱ.

Immediate transfer

This approach requires the transition to be completed within 36 months. At a high level, an immediate transfer might be appropriate if: 

• The next generation is ready to assume full control quickly. 
• Financing is available to complete the buyout in a short timeframe. 
• The family wants to minimize ongoing compliance obligations. 

The CRA can reassess the transaction for up to three years after completionⁱⁱⁱ, so documentation must be thorough.

Gradual transfer

This option allows the transition to occur over five to 10 years. Gradual transfers may be better if:

• The next generation needs time to gain experience before taking full control.
• Liquidity constraints make an immediate buyout impractical.
• The family prefers a phased approach to reduce disruption.

This approach comes with a heavier compliance burden and a longer reassessment window—up to 10 years^iv. Families choosing this route must maintain detailed records throughout the transition period to demonstrate ongoing compliance.

For gradual transfers, certain criteria may be deemed satisfied if timelines are shortened due to events such as an arm’s length sale, prolonged impairment or death of a child or business cessation. This flexibility helps families avoid losing IBT benefits due to unforeseen events.

When evaluating the criteria of whether a genuine transfer has occurred, the CRA may request evidence of a real transfer of ownership and management, in accordance with subsections 84.1(2.3) to (2.32) of the Income Tax Act.

In addition to a comprehensive review with the appropriate tax professionals, taxpayers should consider the following best practices to fortify their compliance strategy:

• Update corporate records and signing authority to reflect new decision-makers.
• Document changes in roles and responsibilities for the next generation.
• Keep minutes of board meetings and employment agreements showing active involvement.
• Ensure the successor is genuinely engaged in day-to-day operations.

Failure to meet the conditions of this test could result in the application of section 84.1, which would negate any expected tax benefits.

Understanding capital gains compliance rules and the lifetime capital gains exemption (LCGE) can result in a more tax-efficient outcome for your business transfer.

Individuals may claim the LCGE for qualifying shares under section 110.6, which was increased to $1.25 million in 2024. This exemption can substantially reduce tax on the sale, if strict eligibility criteria are met. Families should confirm eligibility early and consider strategies to maximize the exemption across multiple family members.

Recent amendments to IBT rules also allow parents to claim an extended capital gains reserve of up to 10 years, instead of the usual five, which can provide flexibility to manage cash flow during gradual transfers. Owners should review their tax strategy promptly to understand how this affects timing and overall tax exposure.

Beyond the core IBT rules, complex tax considerations can impact your business transfer. The following are some common issues to watch for:

• Anti-avoidance rules: Ensure transactions have economic substance to avoid penalties under the GAAR.

• AMT exposure: Large capital gains may also trigger AMT obligations. Modelling the transactions can help evaluate the tax implications as part of your succession strategy.

• Attribution rules: While most IBTs involve adult children and avoid income attribution, certain structures involving minors or spouses may trigger these rules—so plan carefully.

• Structural considerations: Holding companies can offer flexibility and asset protection, but they increase compliance complexity. Similarly, estate freezes remain a common planning tool to lock in value and shift future growth, but they require precise execution to avoid triggering anti-avoidance rules.

Since this list is not comprehensive, it’s essential to consult a tax advisor to ensure your strategy is compliant and tailored to your situation.