17 June 2025 STEP Roundtable Q. 1, 2025-1051571C6 - Succession of Family Business

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Application of the intergenerational business transfer rules where a controlling interest in the purchaser corporation is held through a holding corporation or a trust.

Position: See below.

2025 STEP CRA Roundtable – June 17, 2025

QUESTION 1. Succession of Family Business

Under the new rules for succession of a family business (subsections 84.1(2.31) and 84.1(2.32)), it is clear that there can only be one purchaser corporation. (endnote 1)

1. Can the child group own the purchaser corporation through one or more holding companies owned by them?

2. Can shares of the purchaser corporation be held by a trust under which the only beneficiaries are members of the child group?

3. Can shares of the purchaser corporation be held by a trust if the trustees are all members of the child group and the parents are not beneficiaries?

CRA Response

Preliminary Comments – More than one Purchaser Corporation

A taxpayer who disposes of qualified small business corporation shares or shares of the capital stock of a family farm or fishing corporation to a purchaser corporation may qualify for the intergenerational business transfer exception to the application of section 84.1 if, among other things, at the time of the disposition, the purchaser corporation is controlled by one or more children of the taxpayer, each of whom is 18 years of age or older. However, this exception is only available if the taxpayer has not previously sought, at any time after 2023, to rely on the exception in respect of the same business (Prior Sale Restriction).

The CRA addressed the scope of the Prior Sale Restriction at the CRA Roundtable - 2024 Canadian Tax Foundation Annual Conference (CRA document 2024-1038231C6). In response to a question as to whether simultaneous dispositions of shares of a subject corporation to two purchaser corporations would disqualify either of these dispositions from meeting the requirements of an intergenerational business transfer, the CRA stated that the Prior Sale Restriction did not preclude simultaneous dispositions of shares of the subject corporation to more than one purchaser corporation provided that those dispositions occur as part of the same genuine intergenerational business transfer.

Shares of the Purchaser Corporation held by a Corporation or Trust

It is our understanding that, in each of the three scenarios described above, the question is whether one or more children of the taxpayer will be considered to control the purchaser corporation at the time of the disposition. It should be noted that our views herein are based on the understanding that any reference to a child means a “child” of the taxpayer, as defined in paragraph 84.1(2.3)(a), who is 18 years of age or older.

Part 1.

Paragraphs 84.1(2.31)(b) and 84.2(2.32)(b) require that, at the time the shares of the subject corporation are disposed of by the taxpayer to the purchaser corporation, the purchaser corporation is controlled by one or more children of the taxpayer. While one or more children of the taxpayer are required to control the purchaser corporation, they are not required to own shares directly in the purchaser corporation.

Subsection 256(6.1) states:

For the purposes of this Act and for greater certainty,

(a) where a corporation (in this paragraph referred to as the “subsidiary”) would be controlled by another corporation (in this paragraph referred to as the “parent”) if the parent were not controlled by any person or group of persons, the subsidiary is controlled by

(i) the parent, and

(ii) any person or group of persons by whom the parent is controlled; and

(b) where a corporation (in this paragraph referred to as the “subject corporation”) would be controlled by a group of persons (in this paragraph referred to as the “first-tier group”) if no corporation that is a member of the first-tier group were controlled by any person or group of persons, the subject corporation is controlled by

(i) the first-tier group, and

(ii) any group of one or more persons comprised of, in respect of every member of the first-tier group, either the member, or a person or group of persons by whom the member is controlled.

Paragraph 256(6.1)(a) confirms that a corporation may be controlled directly or through one or more other corporations. Further, paragraph 256(6.1)(b) confirms that a corporation may be controlled by various groups of persons within a corporate structure. Accordingly, the requirement that one or more children of the taxpayer control the purchaser corporation may be met where the controlling interest in the purchaser corporation is held through one or more corporations.

Part 2.

Where shares of a corporation are held by a trust, the trustees of the trust would normally exercise the voting rights attached to those shares. Accordingly, in this scenario, we would generally look to the trustee(s) to determine who controls the purchaser corporation. The fact that the only beneficiaries of the trust are members of the child group is not, in itself, sufficient to meet the requirement that the purchaser corporation be controlled by one or more children of the taxpayer.

For the purposes of subsections 84.1(2.31) and (2.32), paragraphs 84.1(2.3)(c) and (d) contain certain rules that may treat a beneficiary of a trust as owning property held by the trust (such as, in this case, shares of the purchaser corporation). However, these rules are not relevant in determining control of a corporation - they would apply only in determining whether a beneficiary of the trust exceeds the ownership limits applicable to shares or equity interests described in subsections 84.1(2.31) and (2.32).

Part 3.

At the 2022 STEP CRA Roundtable, the CRA addressed the question as to who controls a corporation where the shares of the corporation are held by a trust with multiple trustees. In our response (CRA document 2022-0928191C6), we stated:

Where a trust has multiple trustees, the determination as to which trustee or group of trustees controls the corporation can only be made after a review of all the pertinent facts, including the terms of the trust document. However, in the absence of evidence to the contrary, we would consider there to be a presumption that all of the trustees would constitute a group that controls the corporation.

In circumstances where a trust holds a controlling interest in the purchaser corporation at the time the taxpayer disposes of shares of the subject corporation to the purchaser corporation, and there are multiple trustees of the trust, we would be guided by the above-noted response in determining who controls the purchaser corporation.

Continuous Control

It should be noted that one or more children of the taxpayer are not only required to control the purchaser corporation at the time the taxpayer disposes of the shares of the subject corporation to the purchaser corporation but also to maintain control of the purchaser corporation, subject to certain exceptions, for 36 months following the disposition (in the case of an immediate intergenerational business transfer) and up to 10 years (in the case of a gradual intergenerational business transfer).

Daryl Boychuk
2025-105157

ENDNOTES

1 All legislative references in this document are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended.