The Enhanced Intergenerational Business Transfer re: Budget 2023 Changes

A previous tax blog introduced the private members Bill C-208 which received Royal Assent on June 29, 2021, amending the provisions of section 84.1 of the Income Tax Act, and allowing parents/grandparents preferential capital gain treatment when selling shares of a corporation to a corporation controlled by their adult children or grandchildren. Those shares must be either qualified small business corporation (“QSBC”) shares or qualified farming and fishing corporation (“QFFC”) shares. The government indicated that it would introduce further amendments that are intended to address various concerns and close off any tax loopholes. Almost two years later, Budget 2023 finally introduced proposed amendments to revise the existing scheme, aiming to further facilitate the genuine intergenerational transfer of the family business. These changes proposed in Budget 2023 will come into effect for transfers that occur on or after January 1, 2024.

The proposed amendments provide two options to transfer the business: one is an immediate transfer within three years, and the other is a gradual transfer made over five to ten years. Either one can be chosen for the intergenerational business transfer.

Proposed Common Conditions under the Two Options

Under both approaches, the parent/grandparent must have control of the business prior to the sale. This condition may preclude some business owners from taking advantage of the new rules, depending on who the other owners of the business are. Those parents/grandparents who do not have control of the business but would like to transfer their business ownership to their children/grandchildren under preferential capital gain treatment should consider taking the opportunity to arrange for the transfer before January 1, 2024, under the existing rules.

Another condition being introduced under the newly proposed rules is that legal control of the business must be transferred by the parent/grandparent. At the initial transfer, the parent/grandparent must transfer the majority of voting shares and at least 50% of the Common growth shares of the business to their children and/or grandchildren. Then, the parent/grandparent is required to transfer their remaining voting shares, as well as the Common growth shares over a certain period of time. The rule is that they eventually cannot own more than 50% of any shares of the business other than non-voting shares such as so-called “freeze” shares.
The Budget also extended the purchaser beyond children and grandchildren to stepchildren, children-in-law, nieces, nephews, grandnieces and grandnephews (referred to as children/grandchildren going forward).

Lastly, the parent/grandparent and their children/grandchildren must jointly file an election to agree that section 84.1 will not apply to the transfer.

Major Differences of the Two Options

The conditions requiring immediate transfer are more stringent, given that they require both legal and factual control of the business, including voting shares and effective control of a corporation to be transferred immediately and permanently, and the remaining voting shares are transferred within three years. The management of the business must also be transferred to the children/grandchildren within 36 months. Further, at least one child must be actively involved in the business and maintain legal control for at least 36 months. Lastly, the normal reassessment period is extended by three years (allowing CRA to audit the transaction within 6 years, as opposed to the normal 3 years).

On the other hand, the gradual transfer allows for more transition time. Only legal control of the business must be transferred immediately, and the rest can be done over five to ten years. Under the gradual transfer, the parent/grandparent may still maintain their “factual” control of the business for five to ten years. This might be more practical for most of the family business transfers; however, the parent needs to ensure that the economic value of their debt and equity interests in the business is reduced to 50% of value of QFFC shares at initial sale, or to 30% of value of QSBC shares at their initial sale within the ten years of initial transfer. This particular test is not applicable to the immediate transfer option. Further, at least one child must be actively involved in the business and maintain legal control for the greater of five years or until the business is transferred, as opposed to the 36-month requirement under the immediate transfer rules. Finally, the normal reassessment period is increased to 10 years for a gradual transfer.

Other Amendments

The proposed rules eliminate the requirement to provide the CRA with an independent assessment of the fair market value of the business and an affidavit signed by the vendor and a third party attesting to the share sale. They also enhance the capital gain reserve rules, by allowing a reserve over up to ten years for gradual transfer as opposed to five years.


These amendments really focus on the intention of the rules – the genuine transfer of a business within the family. Speak to your Welch LLP advisor to discuss how these proposals may impact your plans for the succession of your business.

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