Intergenerational Transfer Rules Now Law

Two important changes to intergenerational business transfer rules tabled in Bill C-59 have now come to be passed into law.  All family business owners and their professional advisors should take note.

The key new changes to the rules:

• Parents seeking to sell their business to their children will no longer need to control the company immediately prior to sales.
• Business owners who sold ALL or PART of their business to their child under the former rules (Bill C-208), are not prevented from using the new framework to sell the remainder of their business, or another business, to their child.

The Backdrop. A new Intergenerational Business Transfer Framework which affects the transfer of family enterprises which at the time of transfer are qualifying shares of a small family businesses, farming or fishing corporation to the next generation, was passed into law June 21, 2022 (Bill C-208), However, based on new rules passed under Bill C-59 on June 20,2024, the Bill C-208 rules will only apply if the transferor gives up control and the transferee(s) are active in the business after the transfer according to two specific timelines. 

That is, a “genuine” transfer will qualify for capital gains treatment including the capital gains exemption and related capital gains reserve mechanisms (extended to 10 years, however), rather than taxing the disposition as a fully taxable dividend, if certain conditions are met.  The legislation introduced a gradual (10 year) or immediate (3 year) transfer option, to an adult child, grandchild, (or after January 1, 2024 a niece, nephew, grandniece or nephew).

Parents must transfer control within 36 or 60 months, respectively.  Under an immediate transfer, parents can’t have legal or factual control after the 36 months.  Under the gradual transfer, parents can have an economic interest (but not legal control) but must reduce debt and equity interests within 10 years to 30% of their value for QSBCs and 50% for QFFCs. 

The adult children have obligations as well:  they must carry on an active business for the 36 or 60 months, and at least one child must remain actively involved during these periods or until the business transfer is completed, whichever is the later.    

Parents who transferred a portion of the shares of their companies under the Bill C-208 rules prior to 2024 will be able to benefit from the new rules to transfer the remaining ownership in certain cases.  Otherwise, parents will not benefit from the capital gains treatment under the new rules if they previously started to implement a transfer plan.  The rules for a genuine intergenerational transfer can only be used once in respect of the same business. Also, the transfer cannot be made to a trust; this prevents the scenario where multiple capital gains exemptions are used by various beneficiaries of a trust.  Parents and children are jointly liable for additional taxes down the line if CRA determines that a genuine transfer according to these rules did not take place.

The joint election, and the joint and several liability of parents and children, recognize that the actions of the taxpayer's relatives could potentially cause the parent to fail the conditions for the capital gains treatment. This could happen if the child stops working in the business for example.  In that case, the parent would be subject to assessment or reassessment under subsection 84.1(1).

For these reasons, any child who jointly elects with the parent to have the intergenerational transfer rules apply is, “jointly and severally, or solidarity, liable for tax payable by the parent under Part I of the Act, to the extent that the tax payable by the parent is greater than it would have been had the share disposition satisfied the conditions in subsection 84.1(2.31) or (2.32)”.

Note also that the audit risk period for reassessment has been extended to 3 years and 10 years respectively for these reasons.   A joint election on a prescribed form filed in the year the transfer is completed by both parties is required on or before the filing due date for the transferor in the year of transfer. There are some relieving provisions if the child sells to a non-related third party, sells assets to satisfy creditors, or becomes sick or disabled or dies in the future.

Specifically, under Subsection 152(4) CRA may at any time assess tax and other amounts payable by a taxpayer for a taxation year, but not after the normal reassessment period for the year, which is generally three years from the date of the initial notice of assessment.

New paragraph 152(4)(b.9) CRA may reassess a taxpayer over an additional three year reassessment period after the end of the normal reassessment period for the taxpayer, as all the conditions cannot be satisfied until a minimum period of 36 months has passed.

In addition, new subparagraph 152(4)(b.9)(ii) provides an additional ten year reassessment period after the end of the normal reassessment period as the conditions for a gradual transfer cannot be satisfied until a minimum period of up to ten years has passed. Both these new reassessment guidelines take effect January 1, 2024.

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