In an article written on January 10, 2023 by the Canadian Federation of Independent Business (CFIB),over $2 trillion in business assets could change hands within the next decade as over three-quarters (76 per cent) of small business owners are planning to exit their business. Unfortunately, as the article points out, only one in ten business owners have a formal business succession plan in place.

With the proposed amended intergenerational business transfer (IBT) rules set to take effect on January 1, 2024, there is an opportunity for Canadian tax professionals to assist small business owners in developing a tax-efficient succession plan that includes transitioning the business to their children.

In my May 16, 2023 blog, Intergenerational business transfers, a few potential problems with the IBT criteria under paragraphs 84.1(2.31)(a) and 84.1(2.32)(a) – “control immediately before disposition” were identified.  Under these paragraphs, the taxpayer – either alone or together with their spouse must control the subject corporation immediately before the disposition of the subject corporation shares.

Procrastination by business owners – parent to child

With succession planning involving adult children, it is very common for parents to procrastinate when transitioning the control and equity of their small business corporation. With the amended IBT rules allowing parents to transition their business in a tax-efficient manner, it will be prudent for parents to stop procrastinating to avoid potential tax consequences in the event of their untimely death.

If both parents concurrently met an untimely death before transitioning their small business corporation shares to their children, then their shares would be transferred to their respective estates[1].  The executor or executrix would administer each of the estates and eventually the shares held by the estates would be transitioned to the children.  Assuming that the children are actively engaged in the business on a regular, continuous, and substantial basis and at least one of them has taken over the management, then the IBT rules would appear to be met resulting in a tax-efficient transfer of the corporate business.  However, that would not be the case as control of the small business corporation now belongs to the executor or executrix of the respective estates immediately before the disposition time.

Now if only one parent met an untimely death and transferred the shares to their surviving spouse, then the surviving spouse would inherit the shares and, with a business succession plan in place, could transition all the shares to the children using the IBT rules for a tax-efficient transfer.  This of course assumes that the parents properly drafted their wills to ensure the surviving spouse inherits the company’s shares and not the children.

Letter to the Department of Finance

The “control immediately before disposition” criteria appear problematic in many situations.  In Baker Tilly Canada’s June 8. 2023 letter to the Department of Finance, in response to issues with the proposed IBT rules, we recommended removing this criterion, or at least, expanding the scope of the criterion to be less restrictive.  You can read our letter to Department of Finance here.

A winding path

Although the IBT rules are not overly complicated, collectively the rules create a winding path that needs to be navigated carefully to remain on-side.  Succession planning and the execution of that succession plan is going to become very important as this estimated $2 trillion in business assets slowly transitions over the following decade.

[1] In this scenario, we’re assuming that the parents left the company shares to their children in their respective wills instead of their surviving spouse.