- Selling qualified small business corporation shares to your child who is resident in Canada can spread the gain over 10 years instead of five.
- If you sell shares to a corporation your adult children control, a special election can keep non-share consideration from being treated as a dividend.
- The intergenerational rules are detailed and come with strict time conditions, so they need to be planned before the sale.
Passing a business to a son or daughter is different from selling to an outsider. You may want to accept payments over time, and you may worry that the tax rules will treat a family deal less favourably than a sale to a third party.
The rules do treat family sales differently. This article compares the main routes and explains the exceptions in plain terms, so you know what to ask your accountant and lawyer.
The baseline: a sale to an outsider
When you sell shares of a qualifying company, you may be able to claim the lifetime capital gains exemption. For 2025 and for dispositions after June 24, 2024, it is $1,250,000 of capital gains, a maximum deduction of $625,000. The $625,000 figure is indexed to inflation for taxation years beginning after 2025.
Only one-half of a capital gain is taxable. If part of the price is payable after year end, a reserve generally spreads the gain over five years in total.
Selling to your child personally
When qualified small business corporation shares (or family farm or fishing property) are sold to your child who is resident in Canada, the reserve fraction becomes 1/10 and 9, which spreads the gain over 10 years.
The shares must still meet the qualified small business corporation tests. At the time of sale, the company must be a small business corporation, meaning at least 90% of the fair market value of its assets is used mainly in an active business carried on primarily in Canada, or is shares or debts of connected small business corporations. Throughout the 24 months before the sale, the shares must not have been owned by anyone other than you or a related person or partnership. Throughout those 24 months, more than 50% of the asset value must have been used in an active business.
Selling to your child's corporation
Often a child buys through their own holding company. This creates a risk. Where a Canadian-resident individual sells shares to a corporation they do not deal with at arm's length and the corporations become connected, non-share consideration above the greater of paid-up capital and adjusted cost base is deemed a dividend instead of a capital gain. The capital gains exemption cannot shelter that amount.
An exception exists for intergenerational transfers. The deemed dividend rule does not apply to a sale of qualified small business corporation or family farm or fishing corporation shares to a corporation controlled by your children aged 18 or older, if a joint election is filed.
| Route | Key condition |
|---|---|
| Immediate transfer | The 36-month conditions must be met |
| Gradual transfer | Your retained interest in qualified small business corporation shares must fall to 30% of value within 10 years, and the 60-month conditions must be met |
A 10-year reserve also applies to shares sold to a corporation where these intergenerational conditions are met, and to shares sold under a qualifying business transfer. The detailed conditions and transitional rules should be checked against your facts.
Comparing a family sale with a third-party sale
| Point | Third party | Child |
|---|---|---|
| Reserve period | Up to five years in total | 10 years in some cases |
| Sale to a corporation | Not applicable in the same way | Deemed dividend risk unless the election route is met |
| Exemption | Available if the shares qualify | Available if the shares qualify |
- A reserve is not allowed if the buyer is a corporation you control, or if you were not resident in Canada at the relevant times.
- Deferred gains do not qualify for the capital gains deduction.
- A large gain sheltered by the exemption can trigger alternative minimum tax.
Price still matters. The CRA defines fair market value as the highest price obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length. A valuation helps support the price you choose.
What to do next
- Decide whether your child will buy personally or through a corporation.
- Confirm the company's shares meet the qualified small business corporation tests, and ask about any clean-up needed first.
- Get a valuation to support the price.
- Ask your accountant which route, immediate or gradual, fits your timeline.
- Have a lawyer draft the agreement, the election and any security for payments owed to you.
Frequently asked questions
Is it better to sell to my child than to a stranger?
It depends. A sale to your child can allow a longer reserve of 10 years, but a sale to your child's corporation can create a deemed dividend problem unless the intergenerational conditions are met. An accountant should compare both options using your numbers.
How old must my children be?
For the corporate route, the corporation must be controlled by your children aged 18 or older, and a joint election must be filed.
Can I still use the lifetime capital gains exemption?
If your shares qualify and you meet the other conditions, yes. Non-residents cannot claim it, and a deferred gain does not qualify for it.
Can I take back a loan from my child?
Often this is how family sales work, and the reserve rules above describe how the gain is reported over time. Security, repayment terms and the tax filings should be documented by a lawyer and accountant.
Sources
- CRA – Line 25400 Capital gains deduction — canada.ca
- Income Tax Act, s. 117.1 — Justice Laws (federal)
- CRA Guide T4037, Capital Gains – 2025 — canada.ca
- Income Tax Act, s. 110.6(2), (5) — Justice Laws (federal)
- Income Tax Act, s. 38 — Justice Laws (federal)
- Income Tax Act, s. 40(1)(a)(iii) — Justice Laws (federal)
- Income Tax Act, s. 84.1(1) — Justice Laws (federal)
- CRA Information Circular IC89-3, Policy Statement on Business Equity Valuations — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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