Feds make two key changes to family business transfer rules 

The federal government is providing greater flexibility to business owners who want to sell to their children by making two key changes in new legislation. 

Under Bill C-59, tabled in the House of Commons on Nov. 30, parents looking to sell their business to their children in a tax-efficient manner will no longer need to control the company immediately before the sale, which had been a requirement under draft legislation released Aug. 4. 

Also, business owners who sold all or part of their business to their child under the current rules, enacted under Bill C-208 in 2021, won’t be prevented from using the new framework to sell the rest of their business, or another business, to their child.  

The changes to the Aug. 4 draft legislation in Bill C-59 are “pretty narrow” but important, said Brian Ernewein, senior advisor with KPMG LLP in Ottawa. 

The federal government introduced a new framework for family business transfers in the 2023 budget, amending the rules introduced in Bill C-208, a private member’s bill it had not supported. The amendments were designed to address perceived gaps in C-208 that could allow business owners to convert dividends to tax-preferred capital gains without completing a genuine transfer of the business to family members. 

The changes included in Bill C-59 appear to address issues tax practitioners had raised with the Department of Finance during its consultation process for the Aug. 4 draft legislation, Ernewein said.

The control requirement included in the draft legislation would have limited business owners from transferring shares of their business to their children in a tax-efficient manner if they did not have a controlling interest, he said. 

“What the revised rules appear to do is to remove that requirement so I can transfer, [for example], my one-third or 50% interest to my child,” Ernewein said. “As long as [the child has] control of the interest I’ve transferred to them, [the transaction] will satisfy the rule. I think that’s a sensible change.” 

Bill C-59 also states that only transactions after 2023 will be subject to the provision that effectively requires the business owner to sell all their shares of the business to the child in a single transaction.  

Under the draft legislation, it was unclear to tax practitioners whether business owners who had used the Bill C-208 framework to sell only part of the business to their child would be able to use the new rules to transfer the rest. 

“Effectively, you get two bites of the apple,” Ernewein said. “If you did make a transfer under [Bill C-208 legislation], you will get the opportunity to do so again, but only once again.” 

The effective date for the new framework for the intergenerational transfer of family business is Jan. 1, 2024.