Tax Alert

Intergenerational business transfers: Proposed changes you should know

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Businesses will need to meet additional requirements for the favourable Bill C-208 rules to apply to an intergenerational business transfer (IBT), under proposed changes introduced in Budget 2023. The federal government also proposes to expand the definition of ‘child’ under the IBT rules to include adult nieces, nephews, grandnieces and grandnephews. The proposed amendments to Bill C-208, if enacted, will be effective for transactions occurring on or after January 1, 2024. 


The current IBT rules, which were included in Bill C-208, took effect on June 29, 2021. These rules were implemented to treat the transfer of shares of a small business, family farm, or fishing corporation to a corporation controlled by the owner's child or grandchild similarly to a third-party sale. Consequently, the gain on the sale would be treated as capital gains (which are 50% taxable) rather than fully taxable dividends (as was the case before the legislation was introduced under the “surplus stripping” rules in section 84.1 of the Income Tax Act (ITA).  

Please refer to our tax alert for details about Bill C-208. 

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Proposed changes to ensure genuine transfer of business 

The proposed changes to the IBT rules include new timing requirements to specify when the parent must give up control of the transferred business and when the adult child or grandchild (or a niece/nephew or grandniece/grandnephew for transactions on or after January 1, 2024) whose corporation acquires the shares of the business must have active involvement in the business. These changes, introduced in Budget 2023, are intended to ensure that the rules only apply to genuine IBTs and prevent “surplus stripping”. As a result, the new measures include two options for IBTs: 

  1. an immediate IBT (three-year test) 
  2. a gradual IBT (five-to-ten-year test) 

Both immediate and gradual IBTs must meet the following requirements: 

Before the transfer: 

  • Parent (alone or with their spouse) controlled the corporation being transferred (OpCo) 

At the time of the transfer: 

  • OpCo is a qualified small business corporation (QSBC) or qualifying farm or fishing corporation (QFFC) 
  • Parent transfers OpCo shares to AcquireCo (controlled by one or more adult children) 
  • Parent transfers the majority of OpCo’s voting shares and at least 50% of the common growth shares 

After the transfer: 

  • Parent must transfer the remaining balance of voting shares and common growth shares within 36 months of sale   
  • Parent doesn’t legally control OpCo and AcquireCo and can’t own more than 50% of any OpCo shares other than non-voting preferred shares that meet the definition of “specified class” shares in subsection 256(1.1) of the ITA (e.g., freeze shares) 
  • Parent and each Child must file a joint election in prescribed form 

In addition to the requirements common to both tests, the IBT must also meet the following conditions specific to each transfer option: 

Proposed condition 

Immediate IBT 

(Three-year test) 

Gradual IBT 

(Five to ten-year test) 

Transfer of control and economic interest Parent can’t have legal or factual control (e.g., economic or other influence) after the share transfer 

Parent can still have economic influence, but not legal control after the share transfer. However, Parent must reduce their debt and equity interests in OpCo and AcquireCo within 10 years of the share transfer to: 

  • 30% of their value for QSBCs 
  • 50% of their value for QFFCs 
Transfer of Management (Management test)  Within 36 months of the share transfer, or longer if reasonable  Within 60 months of the share transfer, or longer if reasonable 
Child retains control of business  Child(ren) retains legal control for at least 36 months after the share transfer 

Child(ren) retains legal control for the greater of: 

  • 60 months, or 
  • until the business transfer is completed 
Child works in the business (Engagement test)  At least one child remains actively involved for the 36 month period 

At least one child remains actively involved for the greater of: 

  • 60 months, or 
  • until the business transfer is completed 
Active business  Each relevant business of OpCo must be carried on an active business for the 36 month period 

Each relevant business of OpCo must be carried on an active business for the greater of: 

  • 60 months, or 
  • until the business transfer is completed 

In addition, Budget 2023 proposes relieving rules where the child or children subsequently sell shares to an arm’s length party, or upon the death or physical/mental impairment of a child, in certain situations.  

Proposed capital gains reserve extension 

The rules would allow a parent to claim a capital gains reserve on the share transfer for a maximum of 10 years (rather than five years), provided that either the immediate or gradual IBT conditions have been satisfied.  

Other administrative changes 

For a business transfer to qualify as either an immediate or gradual IBT, the parent transferor and each adult child transferee must jointly elect in prescribed form, on or before the parent’s tax filing deadline for the year of the transfer. The child/children will be jointly and severally liable for any additional taxes payable by the parent if the transfer doesn’t meet the conditions as previously discussed. 

The Canada Revenue Agency can monitor whether the conditions for IBTs are met over the years, as the limitation period for reassessing the parent transferor's tax liability will be extended three years for immediate IBTs, and 10 years for gradual IBTs. 


The proposed changes broaden the scope of eligibility for IBTs to include transfers of ownership to nieces and nephews, as well as grandnieces and grandnephews, which may benefit more Canadian families. 

The two IBT transfer options also offer business owners more flexibility to meet the conditions to exempt them from the “surplus stripping” rules. The immediate IBT option may have stricter requirements but offers finality sooner in the process with a shorter statute barred period. On the other hand, the gradual IBT option allows business owners more time to transition management and economic interest of their business to the next generation. However, both parties of a gradual IBT must closely monitor the transfer’s status over a longer period to ensure they’re compliant with all the tests. 

It’s important to note that the new rules are proposed to apply to transactions on or after January 1, 2024. Therefore, transfers completed in 2023 may still benefit from the current Bill C-208 rules, where the conditions are met.  

Bill C-208

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Transferring your business to the next generation can be complicated. Our advisors can help you with a range of considerations—from determining optimal shareholding structures to determining if your business qualifies for the IBT rules. 



The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.

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