Two siblings work in the family’s Brampton restaurant supply company. A third moved away years ago and has never set foot in the warehouse. Their father, now in his late sixties, has always said “everything is equal for my kids” and also “the business will go to the ones who built it”. Both statements feel true to him. Both cannot be true at once unless someone works out the numbers and writes it down.
Consider that family a hypothetical, but its tension is one of the most common in succession planning. The legal and tax tools matter a lot, and we will come to them. What usually stalls a plan is something else: a conversation no one wants to have about money, fairness, control, and mortality. Founders put it off because the business still needs them. Children avoid it because raising it feels disrespectful. Meanwhile, the risk grows that a sudden illness or death will force the decisions on the family at the worst moment.
This article is general information only. It is not legal or tax advice. Succession plans depend on your family, your company’s value, and tax rules that are complicated and can change, so get coordinated advice from a lawyer and an accountant.
Decide the Goal Before Choosing the Tool
Start with questions, not legal structures:
- Do you want to keep the business in the family, sell it to staff or an outside buyer, or leave that option open?
- How much do you need to live on after you step back, and where will that money come from?
- Who is actually capable of running the company, and do they want to?
- How do you want to treat children who work in the business compared to those who do not?
- When do you want to give up control? This is a separate question from when you want to give up the value.
That last distinction is worth dwelling on. Ownership, control, and management can move at different times. A parent may transfer future growth to children now, keep voting control for another decade, and hand over day-to-day management in stages. Separating those threads often makes the plan easier for everyone to accept.
If your business holds much of your retirement, say so openly. A son or daughter cannot fairly assess a purchase price, a dividend obligation, or a share transfer without knowing that you depend on it. A plan that leaves the founder financially exposed tends to fall apart, because the founder ends up unable to let go.
Equal Is Not Always Fair, and Fair Must Be Costed
Giving each of three children one-third of the shares can sound like the kindest answer. In practice, it may hand the two who work there a silent partner who wants dividends, while the one who lives away has a stake in a company they cannot sell. Disagreements about salaries, reinvestment, and dividends are predictable in that arrangement. In the worst cases, they lead to shareholder litigation.
Alternatives include:
- giving active children the business, and inactive children other assets such as real estate, investments, or a life insurance payout
- using different share classes, so inactive children hold non-voting shares with defined entitlements
- having the active child buy out a share of the value over time, with terms that are affordable for the business
- using life insurance to fund an equalizing gift to a child who is not taking over
Have the value assessed in some reliable way, or at least with an agreed formula. An inheritance that looked equal when the plan was signed can look very different ten years later, after the business has doubled in value. Also consider recognizing the “sweat equity” of a child who has spent 15 years working below market pay. If not addressed, this is a common basis for grievance, and it can even turn into a legal claim of its own, based on alleged promises or unjust enrichment.
Selling or Giving Shares: The Tax Basics
Transferring shares is usually a taxable event. Under the Income Tax Act, a gift of shares to a child, or a sale to a child at less than fair market value, is generally treated as occurring at fair market value for the person giving them. A low sale price does not make the tax go away, and it may produce a double-tax problem for the child. These transfers must be planned, not improvised.
Two federal rules come up repeatedly.
The lifetime capital gains exemption. An individual who sells qualifying shares of a small business corporation may be able to shelter a large capital gain. The federal limit has been set at $1.25 million for dispositions on or after June 25, 2024. To qualify, the company and shares must meet tests involving assets used in active business and holding periods, so a company with substantial cash or investments may need to be cleaned up, or “purified”, in advance. Multiple family members who own qualifying shares may each have an exemption available, which is one reason for considering planning early.
Section 84.1 and intergenerational transfers. Historically, a parent selling shares to a corporation owned by a child could face an unwelcome result: this section could convert what would be a capital gain into a dividend. Amendments now provide a way to treat qualifying transfers to children or grandchildren as arm’s-length sales, including for sales under a staged plan, but only if detailed conditions are satisfied about how control passes, how long the child stays active in the business, and how the transaction is reported. A careful review by a tax advisor is essential, because failing a condition after closing could have serious consequences.
The Estate Freeze
An estate freeze is one of the most widely used tools in this area. In its simplest form, the current owner exchanges common shares for fixed-value preferred shares, generally under a tax-deferred rollover. Those preferred shares carry a value equal to the company’s current value. New common shares, which will capture all future growth, are issued to the next generation, directly or through a family trust.
This caps the founder’s value and therefore the tax that would otherwise be triggered on that growth at death. The founder can retain control through voting shares and can gradually redeem the preferred shares for retirement income. It also allows the next generation to participate in growth immediately.
There are also real traps to avoid. The preferred shares must be properly designed to have a value equal to what was given up. Dividends paid to family members can run into the tax on split income rules. Trusts have their own reporting requirements and a 21-year deemed disposition rule. A freeze also locks you in somewhat: if the business falls in value, or a child leaves, undoing it is not always straightforward. Family law is another issue. Any new shareholder child who is married should get advice about how those shares would be treated if the marriage ended.
What Happens When You Die Without the Plan Finished
Suppose nothing has been done, and the founder dies. Generally, the deceased is treated for tax purposes as having sold their capital property at fair market value right before death, unless a spousal rollover applies. That can create a large tax bill at exactly the moment the business has lost its leader, and the estate may have shares but no cash to pay it.
Estate administration tax in Ontario, often called probate tax, is another cost: $15 per $1,000 (or part of it) of estate value over $50,000. Ontario families with private companies often use two wills, one dealing with assets that require probate and one for assets, such as private company shares, that may not. Done correctly, this can reduce the tax on that value. It needs careful drafting, and it is not appropriate for every estate.
Dependants are also protected. Under Part V of the Succession Law Reform Act, a dependant who is not adequately provided for can ask a court to order support from the estate. A surviving married spouse can choose under the Family Law Act to take an equalization claim in place of what the will gives them. A plan that leaves all the shares to one child can be disrupted if it does not take those rights into account.
Documents to Put in Place Now
Whatever your timeline, these are worth having now.
A will that deals specifically with the shares. Name who receives them, consider who will have authority to vote them, and choose an executor who can actually deal with a business, or appoint separate ones.
Continuing power of attorney for property. Your will speaks only at death. If a stroke or serious illness leaves you incapable while you hold control of a company, someone needs authority over your shares and accounts, and who your attorney will be needs careful thought. Check whether your by-laws or shareholder agreement affect this, and what a financial institution will accept.
A shareholder agreement. Where there is more than one shareholder, this is the rulebook. It should address what happens on death, disability, divorce, or departure, how shares are valued, and how a buyout will be funded. It can include a right of first refusal to keep shares in the family. Life insurance is the common funding mechanism for a buyout on death, and structuring ownership of the policy needs tax advice.
A protected family asset. Encourage a child who receives shares to consider a marriage contract. Under the Family Law Act, gifts or inheritances received from a third party during a marriage can be excluded from net family property in some circumstances, but growth, income, and tracing issues can be complicated if the terms are not clear. A marriage contract that specifically addresses the shares offers greater clarity.
Personal guarantees and lender consents. A founder’s personal guarantees may stay in place long after they leave the business, unless released. Bank covenants may restrict a share transfer, and leases may require a landlord’s consent. Add those to your closing checklist.
Running the Transition
A workable transition often has several stages over a few years. Write down who is responsible for what, and when the founder’s role will change. Introduce the successor to key customers, suppliers, the bank, and the accountant well before the handover. Pay people market wages so that performance can be measured against real numbers, and be honest about whether a family member is the right successor at all. Bringing in an experienced non-family manager may be the most caring option.
Family meetings can help. Some families use a neutral facilitator, particularly when siblings have a history of tension. Giving all the children the same information at the same time, even those who are not getting shares, can prevent suspicion later. The plan should be reviewed every few years and after major events, including a separation, a birth, a large contract, or a change in tax rules.
A family company in Brampton may represent decades of early mornings and missed holidays. That effort deserves a plan that lasts longer than a verbal promise at a family dinner.
Where to Begin
Bring your accountant, your will, your corporate records, and your honest worries to a first meeting. Our corporate law group can work with your tax advisors on the corporate structure and the documents, and can also advise if you decide to sell the business to an outsider. The first useful step is usually a short written statement of what you want, even if it starts as a list of questions, which you can bring when you get in touch.