Selling a business to your children in Canada
Since 2024, a sale to your child’s company can be taxed as a capital gain when the business passes to the next generation. Here are the two routes the law allows and what happens if a condition breaks.
Since January 1, 2024, a parent who sells qualified small business shares to a company controlled by adult children can be taxed on a capital gain and use the lifetime capital gains exemption. The family chooses an immediate transfer, completed within about 36 months, or a gradual one over five to ten years, and files a joint election.
Why a sale to family used to cost more
Section 84.1 of the Income Tax Act is an anti avoidance rule. It stops owners from turning a corporation’s profits, normally paid out and taxed as dividends, into capital gains taxed at a lower rate.
The rule reaches sales of shares to a related corporation. A holding company owned by your son or daughter is related to you, so a sale to it fell inside the rule.
Before 2021, the part of the price paid in cash or a promissory note above the greater of the shares’ cost and their paid up capital was taxed as a dividend. The lifetime capital gains exemption was lost on that part.
An outside buyer paying the same price left the owner with a capital gain and the full exemption. Keeping the business in the family carried a tax penalty.
Bill C-208, then the rules from 2024
Bill C-208, a private member’s bill, received royal assent on June 29, 2021. It carved out an exception to section 84.1 for small business or family farm and fishing shares sold to a company controlled by the seller’s adult children or grandchildren.
The Department of Finance said the exception had too few safeguards. As written, it let a parent convert dividends into capital gains while keeping control of the business.
Budget 2023 set out replacement rules, and Bill C-59 enacted them on June 20, 2024. They apply to transfers on or after January 1, 2024, and offer two routes, an immediate transfer and a gradual one.
Bill C-15, which received royal assent on March 26, 2026, added technical amendments deemed in force from January 1, 2024. A child working fewer than 20 hours a week can now meet the work test, depending on the facts.
The same bill lets the Minister accept a late election, or allow one to be amended or revoked.
The two routes, side by side
Both routes apply to qualified small business corporation shares and to shares of a family farm or fishing corporation. The buyer must be a corporation controlled by one or more of your adult children.
| Condition | Immediate transfer | Gradual transfer |
|---|---|---|
| Parent’s control | Legal and factual control pass to the children at the sale | Legal control passes to the children at the sale |
| Parent’s voting and growth shares | Transferred within 36 months; parent and spouse may keep non voting preferred shares only | Transferred within 36 months; parent and spouse may keep non voting preferred shares only |
| Parent’s remaining interest, shares and debt | Only the 36 month share rule applies | Reduced to 30 percent of its value at the sale within ten years, or 50 percent for a farm or fishing corporation |
| Management passes to the children | Within 36 months, or a longer period reasonable in the circumstances | Within 60 months, or a longer period reasonable in the circumstances |
| Children keep control, and one works in the business | For 36 months | For 60 months, or until the final reduction if later |
| Business stays active | For the same 36 months | For the same period as control |
| CRA reassessment window | Extended by three years | Extended by ten years |
Management here means directing or supervising the business. Giving advice falls outside it. Commentators suggest parents resign as directors and give up signing authority on the bank accounts within the period.
Finance based the immediate route on the terms of an arm’s length sale and the gradual route on a traditional estate freeze. The gradual route allows more flexibility, and the CRA has longer to reassess it.
Who counts as a child
Each child who controls the buying company must be 18 or older. For these transfers the definition reaches well beyond sons and daughters.
- Your own children qualify, and so do the children of your spouse or common law partner.
- Grandchildren and great grandchildren are included, as is the spouse of your child.
- For these transfers only, nieces and nephews count too, on your side of the marriage or your spouse’s.
- A niece’s or nephew’s spouse is covered, along with their children, your grandnieces and grandnephews.
The election and the tax that follows
The parent and each child file a joint election on Form T2066 by the parent’s filing due date for the year of the transfer. It records the route the family has chosen, and a parent can make it once for the same business.
With the election in place, the sale produces a capital gain. The parent can shelter part of it with the lifetime capital gains exemption. The limit is indexed to inflation from 2026, and Finance Canada puts it at $1.275 million.
Alternative minimum tax can still apply in the year of the sale, and an accountant models it before closing. The rules that apply from the 2024 tax year are set out in the changes for sellers since 2024.
A seller paid over time can claim a capital gains reserve and report the gain as the money arrives. On most sales the whole gain is reported within five years. A qualifying intergenerational transfer extends that to ten years.
Pricing and paying for it
The price belongs at fair market value. On a sale to a related person below that value, the CRA treats your proceeds as fair market value anyway, so a family discount leaves the parent’s tax unchanged.
An independent valuation gives the family and the CRA the same number to work from. How to value a business sets out the methods a valuator uses.
Where the child’s company lacks the full price at closing, the parent can carry part of it as vendor financing. The company pays some cash and owes the rest under a promissory note, repaid over several years from business earnings.
On the gradual route, that note counts as part of the parent’s interest. The note and any shares the parent keeps must fall to 30 percent of their value at the sale within ten years.
The reserve and the note work together. As the note is repaid, the parent reports the gain broadly as the cash comes in, with all of it reported within ten years.
Some children also borrow part of the price from a bank. Financing an acquisition covers those options.
If a condition breaks
If the family misses a condition during the test period, section 84.1 applies to the sale after all, back to the date of the transfer. The gain becomes a deemed dividend in the parent’s hands.
The CRA has its extra three or ten years to reassess the parent. The children are jointly and severally liable for the additional tax.
Certain events are treated as meeting the conditions. A child’s death counts, and so does a severe and prolonged impairment suffered after the transfer.
Relief also applies when the children sell all their shares to an arm’s length buyer, or when the business sells all its assets to pay its creditors.
Where owners start
The first question for an accountant is whether the shares meet the qualified small business tests today. If they fall short, purifying the company takes time, because one test looks back 24 months.
The second is which route fits. A parent ready to hand over the keys within three years suits the immediate option. The gradual one fits a parent who wants to keep a stake for longer and accepts the longer audit window.
A sale to a child and a sale outside the family start from the same valuation, and so does a sale to the staff through an employee ownership trust. The free Quick AI valuation gives a first range.
This piece describes the rules in general terms, as in force in September 2026. Advice on your own facts comes from an accountant or a tax lawyer.
Questions owners ask
- Can I sell my business to my son or daughter and still use the capital gains exemption?
- Yes, since 2024, when the sale meets the intergenerational transfer conditions. The shares must be qualified small business corporation shares, and the buyer a company your adult children control. You and each child then file a joint election on Form T2066, and the gain is treated as a capital gain.
- What is the difference between an immediate and a gradual transfer?
- An immediate transfer hands legal and factual control to the children at the sale, and management within 36 months. A gradual transfer hands over legal control at once and allows 60 months for management. The parent’s remaining interest, including any note, must fall to 30 percent of its value within ten years.
- What happens if my child stops working in the business after the sale?
- If a condition breaks during the test period, section 84.1 applies to the sale after all and the gain becomes a deemed dividend. The CRA gets three extra years to reassess an immediate transfer and ten for a gradual one. A child’s death or severe and prolonged impairment counts as meeting the conditions.