17 June 2025 STEP Roundtable Q. 2, 2025-1051581C6 - 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 non-controlling interest in the purchaser corporation is held by a trust.

Reasons: See below.

2025 STEP CRA Roundtable – June 17, 2025

QUESTION 2. Succession of Family Business

It is not permitted for a parent to own any shares in the purchaser corporation or control the purchaser corporation (de jure or de facto control under the 3-year transition rule or de jure control under the 10-year transition rule).

Can shares (which do not amount to control) of the purchaser corporation be held by a trust where:

• the parent is a contingent beneficiary in the event of death of a child or all members of the child group, or
• the parent and the parent’s spouse or common-law partner are sole trustees or a majority of the trustees.

CRA Response

The provisions governing intergenerational business transfers do not prohibit a taxpayer (the “parent” referred to in the question) from owning shares of the purchaser corporation or the subject corporation. (endnote 1) However, the type and proportion of the shares that the taxpayer may own, directly or indirectly in the purchaser corporation or subject corporation are limited by paragraphs 84.1(2.31)(d) and (e) (immediate intergenerational transfer) and by paragraphs 84.1(2.32)(d), (e) and (f) (gradual intergenerational transfer).

In general, following the disposition of the shares of the subject corporation by a taxpayer to the purchaser corporation, the taxpayer (alone or together with a spouse or common-law partner) cannot own, directly or indirectly, 50% or more of the shares of any class (other than certain non-voting preferred shares) of the purchaser corporation or the subject corporation. Further, within 36 months of the disposition and at all times thereafter, the taxpayer (alone or together with a spouse or common-law partner) cannot own, directly or indirectly, any shares of the purchaser corporation or the subject corporation, other than certain non-voting preferred shares.

The term “own, directly or indirectly” is defined, for the purposes of subsections 84.1(2.31) and (2.32), in paragraph 84.1(2.3)(c):

(c) “own, directly or indirectly”, in respect of a property, means

(i) direct ownership of the property, and

(ii) an ownership interest or, for civil law, a right in the shares of a corporation, an interest in a partnership or an interest in a trust that has a direct or indirect interest or, for civil law, a right, in the property, except that for the purposes of paragraphs (2.31)(d) and (e) and (2.32)(d) and (e), this subparagraph does not apply as a look-through rule for an interest, or for civil law, a right in non-voting preferred shares or debt of

(A) the purchaser corporation (within the meaning of subsections (2.31) and (2.32))

(B) the subject corporation (within the meaning of subsections (2.31) and (2.32)), or

(C) any relevant group entity (within the meaning of subsections (2.31) and (2.32));

Further, with respect to a discretionary interest in a trust, paragraph 84.1(2.3)(d) provides:

(d) if a person or partnership’s share of the accumulating income or capital of a trust in respect of which the person or partnership has an interest as a beneficiary depends on the exercise by a person (in this paragraph referred to as a “trustee”) of, or the failure by any trustee to exercise, a discretionary power, that trustee is deemed to have fully exercised the power, or to have failed to exercise the power, as the case may be;

Generally stated, subparagraph 84.1(2.3)(c)(ii) applies to determine a person’s indirect ownership interest in a property by “looking-through” intermediary entities while paragraph 84.1(2.3)(d) applies to preclude the use of discretionary interests in a trust to avoid conditions prescribed by subsections 84.1(2.31) and (2.32). For example, paragraph 84.1(2.3)(d) precludes a beneficiary of a trust from taking the position that, due to the discretionary nature of the trust, the beneficiary does not own any property of the trust.

In applying subparagraph 84.1(2.3)(c)(ii), we would not consider a person to have an interest in a trust where that person’s interest depends solely on the occurrence of an uncertain event (such as a child predeceasing its parent). Accordingly, we would not, during the life of the child or the lives of the relevant members of the child group (in the circumstances described in the first scenario) treat the parent as owning any shares of the purchaser corporation held by the trust.

With respect to the implications of the parent or the parent’s spouse or common-law partner being the sole trustee or a majority of the trustees of a trust that holds a non-controlling interest in the purchaser corporation, we would not consider the parent or the parent’s spouse or common-law partner, in their capacity as a trustee, to own shares of the purchaser corporation for the purposes of paragraphs 84.1(2.31)(d) and (e) and paragraphs 84.1(2.32)(d), (e) and (f). In this situation, we would apply the look-through rule in subparagraph 84.1(2.3)(c)(ii) and, if applicable, the deeming rule in paragraph 84.1(2.3)(d), to determine who owns, directly or indirectly, any property held by the trust.

Daryl Boychuk
2025-105158

ENDNOTES

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