{"id":18074,"date":"2024-09-24T18:58:05","date_gmt":"2024-09-24T22:58:05","guid":{"rendered":"https:\/\/www.millerthomson.com\/?post_type=insights&p=224773"},"modified":"2025-07-10T17:58:18","modified_gmt":"2025-07-10T21:58:18","slug":"new-succession-strategies-for-businesses","status":"publish","type":"post","link":"https:\/\/www.millerthomson.com\/en\/insights\/private-client\/new-succession-strategies-for-businesses\/","title":{"rendered":"New succession strategies for businesses"},"content":{"rendered":"\n

With thousands of baby boomers due to retire over the next few years, many private companies will need to prepare for their succession. To facilitate business transfers, two new tax measures were incorporated into the Income Tax Act <\/em>(\u201cITA\u201d) effective January 1, 2024.<\/p>\n\n\n\n

Making intergenerational transfers easier<\/h2>\n\n\n\n

The first measure aims to make transferring a business to the next generation easier and as tax-efficient as selling to a third party. Historically, it was often less advantageous and more complicated for a shareholder to sell their business to their children than to a third party due to rules set out in section 84.1 ITA. In particular, this anti-avoidance rule recharacterizes as a dividend the capital gains that would otherwise have been realized on the share sale to a corporation not dealing at arm\u2019s length with the vendor, barring a capital gains deduction and access to the advantageous capital gains tax rate.[1]<\/a><\/p>\n\n\n\n

This rule was initially intended to prevent surplus-stripping transactions, but it also applied to share sales within the same family, making intergenerational transfers more complicated. The tax community has long called for amendments to simplify these transfers.<\/p>\n\n\n\n

These amendments, effective January 1, 2024, streamline the transfer of an actively operated business from a parent to one or more of their children, all the while upholding the anti-avoidance rules for surplus-stripping transactions.<\/p>\n\n\n\n

There are two different types of transfers:<\/p>\n\n\n\n

1. Immediate\u2013 akin to a sale to a third party<\/h2>\n\n\n\n

At the time of the sale, the transferor-parent must transfer to the child or group of children de jure<\/em> control (i.e., more than 50% of the voting shares) as well as de facto<\/em> control of the corporation\u2014and any corporation that contributes to the value of the shares sold, and management of each relevant business\u2014in the 36 months following the sale. During this period, the child or children must also retain control of the purchaser corporation and play an active role in business activities.<\/p>\n\n\n\n

2. Progressive\u2013 akin to a sale in an estate freeze<\/h2>\n\n\n\n

At the time of the sale, the transferor-parent must transfer to the child or group of children de jure<\/em> control of the corporation and any relevant corporation, but may retain de facto<\/em> control. Within 10 years of the sale, the value of the parent\u2019s residual interest (e.g., sale price balance or non-voting preferred shares) must be reduced to 30% (or 50% for family farm or fishing corporations). Management must be transferred to the child or children within 60 months. During this period, the child or children must retain control of the purchaser corporation and play an active role in business activities.<\/p>\n\n\n\n

For both types of transfers, the following general conditions must also be met:<\/p>\n\n\n\n