Tax rules and their impact on intergenerational farm business transfers

3.5 min read

There are tax advantages that make transferring a farm, fishing or small business corporation to a family member the same tax as selling to a third party.

Marc St-Roch, FCPA, MTax. and tax specialist at SCF Conseils, a Quebec-based professional services network, says the tax rules also specify eligibility criteria, particularly with respect to capital gains.

Greater recognition of family transitions

If you sell your business’s shares to a company controlled by a family member, such as a child, spouse (including their children), grandchild, niece, nephew, great-niece or great-nephew, you may qualify for a substantial tax exemption on the capital gain realized.

In 2024, Bill C-59 tightened the rules to ensure that they only apply to genuine intergenerational transfers.

St-Roch says that prior to 2021, amounts paid by a child-owned corporation were considered taxable dividends, which significantly increased the buyer’s tax liability and cash flow pressure. In some cases, it meant the buyer had to have up to 70% more cash than the amount paid to the seller.

Now, with the creation of a purchasing corporation by a descendant, it’s possible to transfer funds tax-free from the operating company to the new entity, substantially lightening the financial burden. These funds then go to the seller, who can use their Lifetime Capital Gains Exemption (LCGE).

Legislative developments

The tax rules recognize sales to corporations controlled by children or other eligible relatives as capital gains. This allows the older generation (seller) to use their LCGE, meaning the gain is not taxed as dividends. The tax rules apply only to genuine intergenerational transfers.

Two transfer options

Immediate transfer: The successor takes control of the company within three years (36 months).
Gradual transfer: The transition takes place over a period of five to ten years (60 – 120 months).

Conditions at the time of sale

Each share class transferred must be verified for eligibility at the time of transfer.
Control of the acquiring corporation must be exercised by one or more adult family members, including children, grandchildren, stepchildren, sons- and daughters-in-law, nieces, nephews, great-nieces and great-nephews.

Conditions to be met after the sale

You must own less than 50% of any class of shares of the transferring or acquiring corporation, and you cannot own any shares after 36 months, except for non-voting preferred shares.
You must transfer management and supervision of the business to your children or eligible successors within 36 or 60 months, in the case of a gradual transfer.
For a gradual transfer of a family farm or fishing operation, you have 10 years to reduce your interest (debt or preferred shares) to 50% or less of its original value.
You must ensure that your children or eligible successors retain control of the purchasing corporation and that at least one of them is actively involved in the business for 36 to 60 months after the sale, depending on the type of transfer.

Capital gains deduction amount

The Lifetime Capital Gains Exemption limit of $1,250,000 adjusts for inflation starting in 2026. This is a lifetime limit, meaning any amount from previous years will reduce the remaining balance available to the taxpayer.

Rules applicable in Quebec

Your transaction must satisfy both federal and provincial criteria. Before 2024, Quebec had different and more restrictive conditions than the federal government, which made it difficult to plan intergenerational transfers. However, as of January 1, 2024, there is full alignment with the federal rules, making it easier for Quebec owners to structure their transfers. Some technical requirements must still be met. It’s important to consult a tax specialist to ensure your situation complies with all requirements of both levels of government.

The importance of planning your transfer

It’s possible to transfer your business to your children or other eligible family members and retain the same tax benefits and financing opportunities as you would selling to a third party.

“Careful planning under the guidance of taxation, accounting and business law specialists is key to a successful transfer and ensuring the long-term future of your business,” St-Roch says.

Article by: Mélanie Lagacé

Accounting & taxes Farm transfer Business planning & structures