Selling a Business to Your Children in BC: Family Succession Options

If one or more of your children already work in the business, passing it on to them can feel like the natural exit. But a family transfer raises questions an outside sale does not: what price is fair, how the children will pay, how much control you keep, and what your other children receive.

This article outlines the main ways BC owners transfer a business to their children, the tax rules that shape the structure, and the legal documents that help a family succession hold together. It is an overview only; the right structure depends on your numbers, so your lawyer and accountant should plan it together.

Start with the real questions

Before choosing a structure, most families need answers to a few practical questions:

• Do you need money from the business to retire, or can you afford to pass it on for little or nothing?
• Which children will run the business, and are they ready to manage it?
• How quickly do you want to step back, and do you want to keep some control or income for a while?
• How will children who are not in the business be treated?

If you are still weighing a family transfer against selling to a third party or winding down, our article on exit options when retiring from your business compares the wider choices. This post focuses on keeping the business in the family.

Option 1: sell to your children

A sale at fair market value is the cleanest structure for tax purposes and gives you retirement money. Children rarely have the cash to pay up front, so family sales often use a vendor take-back: the children (or their company) pay a portion now and the rest over time, sometimes from the business's own profits. The agreement should deal with security for the unpaid balance, what happens if payments stop, and what happens if a child leaves the business or separates from a spouse.

Price matters. Under the Income Tax Act, if you sell to a person you do not deal with at arm's length, such as your child, for less than fair market value, you are generally treated as having received fair market value. The child's tax cost is not stepped up in the same way, so an undervalue sale can lead to the same growth being taxed twice. A professional valuation is often worth the cost.

Option 2: gift the business

You can give shares or business assets to your children. A gift does not avoid tax: the Income Tax Act treats a gift as a disposition at fair market value, so you may owe tax on the gain even though you received nothing. The child acquires the property at fair market value. Gifting can still make sense alongside other steps, but it needs planning, and you should be sure you will not need the value later.

Option 3: an estate freeze

An estate freeze is a common way to pass on future growth without giving up today's value. In broad terms, you exchange your common shares for fixed-value preferred shares, and new common shares are issued to your children directly or through a family trust. Your share of the value is frozen at today's level, future growth belongs to the next generation, and you can often keep voting control and redeem your preferred shares gradually for retirement income. Freezes have detailed tax and corporate requirements, so the steps should be designed with your accountant.

The intergenerational transfer rules since 2024

For years, a rule in section 84.1 of the Income Tax Act could turn what would otherwise be a capital gain into a deemed dividend when an owner sold shares to a corporation controlled by their children. That made selling to your children's company less attractive than selling to a stranger.

Amendments now provide an exception for genuine intergenerational transfers after 2023. Very broadly:

• Who and what. The seller must be an individual, the buyer must be a corporation controlled by one or more of the seller's children who are at least 18 (for this purpose children can include nieces, nephews and some others), and the shares must be qualified small business corporation shares or shares of a family farm or fishing corporation.
• Immediate transfer. The parent gives up control at the sale, gives up all shares other than non-voting preferred shares within 36 months, and takes reasonable steps to hand over management within 36 months, while a child stays actively involved in the business.
• Gradual transfer. A longer route that allows the parent to step back over 5 to 10 years, reducing their remaining interest below set limits within 10 years.
• Election. The parent and children must file a joint election with the CRA by the parent's filing due date for that year.

The conditions are detailed and continue after the sale, and the exception is generally a one-time option for a given business. If they are not met, the tax result can change. This is an area where your accountant's advice is essential and the legal documents must match the tax plan.

Keep the family side in view

The tax structure is only part of a successful succession. Families also need:

• A shareholders' agreement covering who controls the company, how disputes are resolved, and what happens on death, disability, divorce or a child leaving. See our guide to shareholders' agreements in BC.
• Updated wills and powers of attorney. If the business is your main asset, the will must deal with how children outside the business are treated. Under the Wills, Estates and Succession Act, a child who believes a will does not make adequate provision for them can ask the court to vary it. Equalizing with other assets, life insurance or a clear plan can reduce that risk. Our article on estate planning for BC business owners explains the main tools.
• Thought about the children's own relationships. A business interest your child receives may be affected if they later separate. A marriage or cohabitation agreement can help, and should be raised early and handled sensitively.

Above all, talk openly with your children and get independent advice for them where interests differ. A succession plan that everyone understands is far more likely to last.

Planning to pass the business to your children? Start the conversation early

Our business purchase and sale lawyers can work with you and your accountant on the transfer structure, prepare the purchase, shareholder and estate documents, and help keep the plan fair for the whole family.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.