When it comes to transferring the family business to the next generation, the tax rules in Canada are changing. Existing ‘anti-avoidance’ rules, which are meant to prevent the extraction of profits as a tax-free return of capital rather than as a taxable dividend, are being changed with a goal of equalizing the tax efficiency between arm’s length and non-arm’s length transfers.

The new rules come into effect on January 1, 2024

The original rules, which are effective until December 31, 2023, are somewhat less restrictive when it comes to the transfer of management and control, while the revised rules require an immediate transfer of control but provide options to complete the transfer of the business, immediately or gradually.

What to consider if you are a business owner

The key question for business owners who are considering transferring their business to the next generation, is whether to do it now under the existing rules or wait to apply the new rules or consider other options. The answer to that question will depend on how soon you, as the business owner, want to give up management and control of your business.

• Under the new rules as of January 1, 2024 - If the transfer of legal and factual control (which means not only transferring the majority of the voting shares but also the business decision making) is not a concern, then the new immediate transfer rules provide a tax efficient succession plan and can be used starting January 1, 2024. If the transfer of factual control is an issue, then the new gradual transfer option could be reviewed. You should obtain professional advice regarding the other requirements under these options.

• Under the existing rules (until December 31, 2023) - If you, as owner, are not ready to give up control, then planning could be completed to fall into the less restrictive existing provisions of the original rules which are effective until December 31, 2023. Time is running out to use this option! If this option is to be considered, keep in mind that there must be a true intention to transfer the business, as Finance and CRA have stated they will look at transactions that abuse the intent of the rules and you should obtain professional advice before any planning is completed.*

• Some other options - If you, as owner, want to transfer the business gradually, then you could consider a collateral assignment of a life insurance policy so that an adult child can borrow funds to purchase the shares personally.

If you are considering transferring your family business to the next generation, reach out and discuss these planning options with your professional Advisors.

*This is not the case in the province of Quebec where the current rules are more restrictive, however on January 1, 2024, Quebec will harmonize its provincial rules with the new federal rules.