Intergenerational Business Transfers

Generally, the rules introduced in Bill C-208 were designed to allow a sale of shares that otherwise qualify for the capital gains exemption to be sold to a non-arm’s length corporation (referred to here as the “business transfer rules”).  The business transfer rules allow the vendor to benefit from the capital gains exemption without being recharacterized as a dividend under section 84.1


Amendments to the business transfer rules introduced in Bill C-208 were subsequently announced in Budget 2023, which states that the favourable tax treatment introduced in Bill C-208 would “apply only where a genuine intergenerational business transfer takes place.”  The amendments were designed to eliminate potential abuse of the business transfer rules.


To qualify under the amended business transfer rules, several conditions must be met. These include general conditions that would apply to all transfers and specific conditions that would apply in two scenarios:


  • “immediate transfers” made within 36 months
  • “gradual transfers” made over five to 10 years

The conditions to qualify for either an “immediate transfer” or a “gradual transfer” are very complex and professional advice is required in determining whether a particular transaction will qualify. Where the conditions are met for either an “immediate transfer” or a “gradual transfer” and an election is made, the business transfer is excluded from Section 84.1’s deemed dividend rules.


The business transfer rules are scheduled to come into effect on January 1, 2024.


In addition, the following amendments to the business transfer rules were also introduced in Budget 2023:


  • eliminate the requirement to provide the Canada Revenue Agency with an independent assessment of the fair market value of the shares sold and an affidavit signed by the vendor and a third party attesting to the share sale
  • eliminate the grind on capital gains exemption claims where the corporation sold (or associated group) has taxable capital employed in Canada exceeding $10 million
  • enhance the capital gain reserve rules by allowing a reserve over 10 years for sales that qualify as immediate or gradual transfers
  • increase the normal reassessment period by three years for immediate transfers and 10 years for gradual transfers
  • add joint and several liability for payment of tax under certain conditions.

The business transfer rules are complex, and it can be difficult to distinguish the conditions and characteristics of genuine versus non-genuine intergenerational transfers.  A detailed technical review of the legislation as it applies to the taxpayer’s corporate structure is crucial.