Strengthening the Intergenerational Business Transfer Framework
The Intergenerational Business Transfer (“IBT”) regulations came into effect on June 29, 2021, through Bill C-208. Before this, when parents transferred shares of their corporation to one owned by their children, it was considered as deemed dividends rather than capital gains. Bill C-208 aimed to provide an exception to this rule, enabling parents to benefit from the same tax advantages as selling to unrelated parties, utilizing the lifetime capital gains exemption or receiving capital gain treatment (which is 50% taxable as opposed to fully taxable dividends) during the transfer.
Budget 2023 Amendments to Bill C-208
Budget 2023 proposes changes to Bill C-208 rules to ensure they apply only to genuine intergenerational business transfers. A genuine transfer involves the exchange of shares from a natural person (the Transferor) to another corporation (the Purchaser Corporation), subject to specific conditions. The federal government also suggests expanding the definition of ‘child’ to encompass adult nieces, nephews, grandnieces, and grandnephews under the IBT rules. If these proposed amendments to Bill C-208 pass, they will be effective for transactions occurring on or after January 1, 2024.
New timing requirements have been introduced, outlining when the parent must relinquish control of the transferred business and when the adult child, grandchild, niece, or nephew acquiring the shares must actively participate in the business. Consequently, two IBT options are available:
- Immediate IBT (3-year test)
- Gradual IBT (5–10-year test)
Both options have three key conditions:
1) Prior to the transfer, the parent, either alone or with their spouse, controlled the corporation being transferred;
2) At the time of the transfer, the parent’s corporation is a qualified small business corporation, a qualifying farm, or a fishing corporation. The parent must transfer the majority of the corporation’s voting shares and at least 50% of the common growth shares to the corporation controlled by one or more adult children; and
3) After the time of the transfer, the parent must transfer the remaining balance of voting shares and common growth shares within 36 months of the sale. The parent cannot legally control either the transferred corporation or the child’s corporation and cannot own more than 50% of any shares of the transferred corporation, except for non-voting preferred shares defined as “specified class” shares as per subsection 256(1.1) of the Income Tax Act (e.g., freeze shares). Additionally, both the parent and child must file a joint election in the prescribed form.
IBT Requirements for each transfer option
|Proposed Condition||Immediate Business Transfer (3-year test)||Gradual Business Transfer (5–10-year test)|
|1) Transfer of Control of the Business||Parents immediately and permanently transfer both legal and factual control, including an immediate transfer of a majority of voting shares, and a transfer of the balance of voting shares within 36 months||Parents immediately and permanently transfer only legal control, including an immediate transfer of a majority of voting shares (no transfer of factual control), and a transfer of the balance of voting shares within 36 months|
|2) Transfer of Economic Interests in the Business||Parents immediately transfer a majority of the common growth shares, and transfer the balance of common growth shares within 36 months||Parents immediately transfer a majority of the common growth shares, and transfer the balance of common growth shares within 36 months
In addition, within 10 years of the initial sale, parents reduce the economic value of their debt and equity interests in the business to:
|3) Transfer of Management of the Business||Parents transfer management of the business to their child within a reasonable time based on the particular circumstances (with a 36-month safe harbour)||Parents transfer management of the business to their children within a reasonable time based on the particular circumstances (with a 36-month safe harbour)|
|4) Child Retains Control of the Business||Child(ren) retains legal (not factual) control for a 36-month period following the share transfer||Child(ren) retains legal (not factual) control for the greater of 60 months or until the business transfer is completed|
|5) Child Works in the Business||At least one child remains actively involved in the business for the 36-month period following the share transfer||At least one child remains actively involved in the business for the greater of 60 months or until the business transfer is completed|
Overall, while beneficial, the Intergenerational Business Transfer is not easy to navigate, and mistakes during the transfer process can be costly. Should you have any questions about your business and the potential impact of the Intergenerational Business Transfer, please contact us today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.