15 Dec Intergenerational Transfers – What changed in 2024/2025?

Intergenerational transfers provide for family business owners to transfer their business to the next generation in a tax-efficient manner.  This is still not widely used due to the complexity and the unfamiliarity to the rules by client and professionals. Below we will discuss some of the key changes from the original intergenerational rules introduced.

Key changes:

The amendments to section 84.1 of the Income Tax Act (“ITA”) introduce two main pathways for qualifying intergenerational business transfers:

• Immediate Business Transfer (IBT): Ownership and management are transferred within 36 months.
• Gradual Business Transfer (GBT): The transfer is phased in over 60 to 120 months (5 to 10 years).

These options are set out in new subsections 84.1(2.31) (immediate) and 84.1(2.32) (gradual).

Technical and Administrative Guidance

The CRA provided additional guidance on the application of the new subsection 84.1(2.31) and (2.32) as follows:

• The definition of “child” is expanded to include not only direct descendants but also nieces, nephews, and their spouses, as well as children of nieces and nephews.
• The rules require that relinquishment of control and management, as well as the active engagement requirement, apply not only to the subject corporation but also to any “relevant group entity” (i.e., any other person or partnership carrying on an active business relevant to the qualification of the subject shares as QSBC or FFFC shares).
• The transferor may retain only non-voting preferred shares, subject to strict limitations to prevent the retention of control or significant economic interest.
• The capital gains reserve is extended from 5 to 10 years for qualifying intergenerational transfers, allowing the transferor to spread the recognition of the capital gain over a longer period.
• The 20-hour per week test for active engagement is a “bright-line” test, but for a group of children, it is sufficient if at least one child meets the test at all times, even if different children do so at different times. Prior engagement before the transfer does not count; the test must be met after the transfer.
• The transfer of management must be to the child(ren) who are actively engaged in the business, and the transferor must permanently cease to manage the business within the required period.

Practical Implications and Planning Considerations

• The rules are highly technical and require careful planning to ensure all conditions are met, especially regarding the relinquishment of control, the retention of only specified classes of shares, and the ongoing active engagement and management transfer requirements.
• Proper documentation, including the joint election and evidence of management transfer and active engagement, is essential.
• Special care is needed where the family owns multiple businesses or where the business structure involves holding companies or partnerships, due to the broad definition of “relevant group entity.”
• The rules provide relief for certain events (e.g., sale to an arm’s length party, death, incapacity), but not for all possible scenarios (e.g., bankruptcy or insolvency is not explicitly covered).

Summary Table: Immediate vs. Gradual Transfer

Conclusion

The 2024 rules for intergenerational business transfers under section 84.1 of the ITA provide a clear but complex framework for tax-efficient family business succession. The rules are designed to ensure that only genuine transfers (where control, management, and economic interest are truly passed to the next generation) qualify for the exception to the anti-surplus stripping rules. Compliance with the detailed conditions, proper documentation, and careful planning are essential to benefit from these new provisions.

Please contact our tax team for further guidance or to discuss how these changes may impact your family business succession planning.