Transferring Business to Family Member in Canada
Allan Madan, CA
As a baby-boomer coming close to retirement, you may consider transferring your business to a loved one in the future. Here are a few simple tips to get you started.
Mistakes You Can Make When Transferring a Business
The biggest mistake that business owners make is selling a business to their family members for a nominal value, such as $1. If it were that simple, everyone would do it. However, there are significant, negative consequences for selling your business at $1, when it’s worth a lot more.
For example, let’s assume that your business is worth $500,000 and that you sold it for $1 to your adult child. As a result of selling your business for less than its actual value, the Canada Revenue Agency (CRA) will reassess the selling price to the fair market value of your business.
To determine fair market value of your business, the CRA will evaluate:
Once the CRA has completed their evaluation of your business, they will re-adjust the selling price from $1 to $500,000, and will levy capital gains tax on the sale.
To make matters worse, your adult child will not receive an upward adjustment in the cost of the shares that he/she purchased from you. Essentially, instead of $500,000, the cost of the shares belonging to your adult child will still be $1. If your adult child decides to sell the family business later in life, capital gains tax will be levied again.
Use an Estate Freeze
The correct method to transfer your business to a family member in Canada is to utilize an Estate Freeze.
Using an Estate Freeze will allow you to:
• Transfer your business to family members without incurring any income tax whatsoever;
• Retain control of your business after the transfer; and
• Have a steady stream of retirement income
How to Implement an Estate Freeze
Step 1: Create a Family Trust
A Family Trust is a legal document which states that the shares of your business are to be held by the Family Trust on behalf of your loved ones. The main reason a Family Trust is used in an Estate Freeze is to allow you to retain control over your business, even after you have transferred it to your family members.
For instance, imagine that you sold a multi-million-dollar business to your 19-year-old son without a Family Trust. Your son may say, “Mom and dad, thanks for giving me your company. You no longer have control, so I’m going to buy a Ferrari and squander all of the money.”
Step 2: Cancel your old shares in your company in exchange for new preferred shares
Preferred shares are fixed in value, and are equal to the fair market value of your business immediately before the transfer of your business to your family members. Dividends should be paid on your preferred shareholdings, in order to ensure that you have a steady stream of income during your retirement years.
Step 3: Issue common shares in your company to your newly created Family Trust
This will allow the future growth value of your family business to accrue to your Family Trust.
You must implement an Estate Freeze in order to transfer your business over to a family member in Canada. It will avoid any income tax on the transfer of your business to your loved one and allow you to retain control of your business through the use of a family trust. This will also ensure a steady stream of retirement income for you in the long run.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
I looking for the best possible way to transfer ownership of the family business. My main concern is tax implications not retention of control.
The best method of transferring ownership of a business is to transfer the shares of the company to the other party.
If you are transferring the shares to your family members, you have the option of selling the shares or the option of gifting the shares. In terms of tax implications, if you sell the shares at a gain or loss, it will be reflected according in your personal tax return, and 50% will be taxable. You may be able to claim the capital gains exemption on the sale of shares.
I have a family business in Canada, and I would like to know how can I transfer my sister’s shares of the company to my niece (my sister passed away, thus i would like to transfer her shares to her daughter).
I presume that you inherited the shares from your deceased sister. I will answer your question based on this presumption. When your sister passed away, her shares were deemed by the Canadian Income Tax Act to be sold at their fair market value on the date of death. If your sister’s shares increased in value from when she acquired them, then her estate would have to pay tax on the capital gain realized on the deemed sale.
Since your sister’s shares were transferred to you on her death, we must determine the cost basis of those shares to you. Your cost basis in your sister’s shares is equal to the fair market value on the date of your sister’s death. If you plan on immediately ‘gifting’ or selling those shares for market value to your niece, you will not realize a capital gain on the transfer.
I would like to know if you can please explain how a flexible estate freeze works ? Can I redeem my newly exchanged preferred shares over years? Lets say 10% in each of the next 4 years and then remaining 60% down the road ?
Thank you for your question.
It depends on whether the freeze shares issued to you are redeemable and retractable. Assuming that they are, the board of directors must pass a resolution to have the corporation redeem the shares in the manner you prescribed.
My brother and I are considering doing an estate freeze with our corporation. We will take back preferred shares and then the kids can acquire common shares. However our sister passed away a while back. She never had any shares of the company but we would like to transfer some of the business over to her daughter. I was wondering what was the best way to do this? Would our niece be able to acquire common shares too after the estate freeze without any major tax implications?
Once you freeze the corporation, you can issue common shares to your niece. She will have to pay a nominal amount to acquire the common shares. Note that if she is a minor, then the shares must be held in trust for her.
My younger brother and I each own 50% of our company. Can I (only) freeze my shares in return for preferred shares while my brother keeps his original shares ? My son will then be issued different shares in the corporation going forward.
Yes, this can be done. If you and your son have the same class of shares, then you must exchange your shares pursuant to Section 85 of the Income Tax Act and complete form T2057 along with a Section 85 rollover agreement. If you and your son have separate classes of shares, then you can exchange your shares pursuant to Section 86 of the Income Tax Act and complete a Section 86 Share for Share Exchange Agreement.
I run a business in Vancouver BC. The other 50% share holder is my husband who has abandoned the business and left the country. I am in the process of divorcing him. He is wanting to give his 50% of his shares to our 3 children and wants nothing more to do with the business at all. I am wondering how this can be done?
Hi, Pam. He can gift the shares to his children. A lawyer should prepare a gift agreement. There could be a capital gain if the shares have value.
Thank you Madan for the informative video and tips. can the settler be a third party who has no interest in the business nor associated with the business?
Hi, Raj. Yes, a settler is usually a third party.
I want to know if there will be any ramifications in this transaction: Nephew is running the business for Uncle, Uncle owns 100% of the shares. Nephew and Uncle have agreed that Nephew should have controlling interest in the business because Uncle is getting older, and Nephew wants to ensure the continuation of the business he’s invested 10 years into. Nephew will buy Uncle’s shares (51%) for FMV with his after-tax earnings. Uncle will claim the proceeds under his lifetime exemption on his personal tax return as he’s not used any of it so far.
Will this trigger any tax complications for Uncle?
Is Uncle able to give Nephew a payment arrangement for the proceeds of disposition?
Hi, Barb. The uncle should make sure that his shares are “Qualified Small Business Corporation Shares” so that he can claim the life time capital gains exemption. Note: The uncle may have to pay Alternative Minimum Tax on the sale of the shares, but he can have this amount credited against taxes payable in future years. A payment arrangement can be made.
I am purchasing a company from a relative, she suggest me not to get a lawyer anymore as we will just do a change or transfer of ownership. Is there any important details that I need to make sure that was done correctly? Thank you
Hi Nells, you should certainly hire a lawyer to update the corporate minute book for the sale (if you are buying shares) and to prepare a purchase agreement. The lawyer can also help indemnify you from any liabilities that arose before you purchased the business.
I have an interest in Providing investment capital for businesses that are being sold to family members or a long time employee. If you need by Financing to make that happen or give me a call .
Myself and my brother have holding compaies holding the shares of our operating company
I wish to retire and he wants control so we are ready to go and have agreed on price etc. I am not allowed to claim my capital gains exemption because we are blood related Is there any way for me to benefit from the capital gains exemption available to all canadians
Hi Anthony, you are allowed to claim the capital gains exemption on the sale of shares in the capital stock of a Canadian Controlled Private Corporation to family members.
If I sell my shares to my step son whom is 45 yrs old can I still take my capital gain exception
Hi Jim, yes, you can, so long as the shares that you are selling are “Qualified Small Business Corporation Shares”.
Our family corporation has done a freeze and we have created a family trust. I own 50% of the company with my sister and brother in-law owning the other 50%. My son and my two nephews would like to take over the farm. Wanting each to own 1/3, do I have to charge my nephews actual share value at time of the freeze or is there an easier way for a transfer?
You should sell a portion of your freeze shares and equity shares to your nephews. The freeze shares are fixed in value, where as the equity shares (that participate in company growth) must be sold at the current market value.
OR, you can perform a second freeze, allowing your nephews to become equity shareholders for a nominal amount.
If I impement an estate freeze for my bussines for my son to take over my business what will my son have to pay when I die.
Your estate will have to pay capital gains tax on the deemed sale of your freeze shares upon death. The capital gain will be equal to the difference between (a) the value of the freeze shares owned by your estate as of the date of your death and (b) the adjusted cost basis of the outstanding freeze shares as of the date of your death. Your estate may be able to claim the lifetime capital gains exemption to reduce the capital gain. Furthermore, consider redeeming the freeze shares over time so that they are fully gone by the time of your death.
What’s the best way to transfer my wife’s separate class of common shares to a holding company without any tax implications?
The best way to transfer your wife’s common shares to a holding company owned by her is through Section 85 of the Canadian Income Tax Act. If done properly, there will be no tax payable upon the transfer.
Thanks for the video, quite insightful.
My father owns (100% shares) a 13 year old consulting business in the Quebec aerospace sector (All eggs in one basket) in which I’m an employee administrator with 0% shares. His succession plan was that I inherit the company. Due to recent head wind situations, we’ve agreed that its imminently time to completely transfer the business to me so I can attempt to deploy a life support plan…the prospectus is not very good. Considering the above, he’s not willing to spend on valuation of the company but high level its roughly…392K is sales with 72K EBIT in 2018, slightly lower in 2017 and slightly lower in 2016.
Im not willing to BUY the company as the prospectus is not good and will need to inject my own retained earnings in his company to seek new business. But I am willing to take ownership of it if shares are gifted. Whats the best way for me to take ownership/control of the company without having to buy the company/shares? Can he gift me his shares and benefit from a tax deferred rollover ? and what tax implications should I be concerned about.
Thanks for any insight.
You and your father should hire a Chartered Business Valuator to determine the fair market value of the business. If the business has a positive FMV, then your father will pay capital gains tax if the shares are gifted to you. This is because a gift is treated as a deemed sale for tax purposes. Your father may be able to claim the Lifetime Capital Gains Exemption in order to avoid paying tax on the capital gain realized upon the transfer of the shares to you, providing certain conditions are met.
Thanks for the excellent wealth of info on your site. I’m looking to move to the US soon and I’m the sole owner of an IT consulting CCPC with under $300k in assets/earnings. I’m considering transferring my business over to a family member before the move, but I have plans to return to Canada in the future to reestablish control of the company. I don’t foresee the company generating any large profits while I’m away. Would you recommend an estate freeze for my case? Should I set up a family trust as well?
You are currently exposed to a departure tax on the value of your shares in the capital stock of your CCPC. An estate freeze will not solve this problem. The simplest solution is to pay a dividend from the company to yourself prior to your departure, such that the company has no remaining assets. This dividend will be taxable to you. The other option is to enter into an agreement with the CRA to postpone the departure tax.
HI Madan, we have a family business, I am a shareholder with my dad and mom, my parents wants me after their death I take over the company but because they give me the company, they want me to give 200K$ to my sister for 4 consecutive years. How can I do this? thank you
I suggest that you restructure the company and perform an estate freeze. This will involve the shares of the company being owned by a Family Trust, where you and your parents are beneficiaries. In this manner, the company can be eventually transferred to you in a tax-efficient way. Furthermore, to give $200,000 per year to your sister, you will have to do so from personal savings. You cannot pay dividends to your sister if she is not actively involved in the business, even if she becomes a shareholder or beneficiary of the Family Trust. Please let me know if you have any questions.
hi i just had a question for you my business is Inspection of pipeline and sandblasting coating of pipeline i want to give my son half of the business as he is Frist Nations and working on the trans mountain pipeline here in British Columbia it is on Native land. As my son is First Nations we would have a better chance of getting the jobs of sandblasting and coating Company on the pipeline and inspecting the pipeline. how do i go about adding him to the business as a partner 50-50%. i have the business in my name only as of now and the banking in my name.
Consider selling one-half of your shares in the capital stock of your corporation to your son. A share sale agreement must be prepared and the company’s corporate minute book must be updated. In addition, the sales price must be equal to the market value of the shares sold. This could trigger a capital gain. You may be eligible for the lifetime capital gains exemption if certain conditions are met, in which case you may be able to exempt the gain from tax.
Would you know an aprox cost to create a family trust and yearly amount to maintain it for legal and or accounting?
The approximate cost is $1,530 and the annual filing fees start from $750.