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Canada’s capital gains deduction is a powerful tax break available to Canadian-resident individuals who sell shares in a Qualified Small Business Corporation (QSBC). It allows up to $1.25 million in capital gains to be tax-free. For an Ontario resident at the top marginal rate, that can mean tax savings as high as $335,000.
To qualify, the business must, among other things, be a Canadian-controlled private corporation that generates active business income. If more than one person owns shares—like a spouse or adult children—each can potentially claim the deduction, multiplying the benefit.
Passing the business to family isn’t as straightforward. If a child buys the shares through their own holding company—often the most practical setup—the sale may be taxed as a dividend instead of a capital gain, wiping out the deduction. From a tax perspective, that can make selling to a stranger more beneficial than selling to your own child.
Recognizing the flaw, the federal government introduced new rules in January 2024 that allow for the deduction to still apply in family transfers—but only if certain conditions are met for either three or ten years after the sale. These rules are designed to confirm the transfer is a genuine succession plan and not a workaround to withdraw corporate funds tax-free. If those conditions aren’t met, the CRA can retroactively reclassify the capital gain as a dividend, which could trigger a large tax bill.
If claiming the deduction isn’t possible, an estate freeze is another option. It allows the current owner to lock in the value of their shares and shift future growth to the next generation, all without triggering immediate tax. Parents can still access money through dividends, redeem shares gradually, or continue drawing a salary. They can also keep voting control of the business.
Selling or passing down a business isn’t just about finding the right buyer—it’s about structuring it in a way that protects what you’ve built and supports your family’s future.
Need guidance on your next steps? Zeifmans can help.
Zeifmans specializes in guiding family businesses through seamless succession planning. From tax-efficient wealth transfers to leadership transitions, our team helps you protect your legacy and prepare the next generation. With personalized strategies and over 65 years of experience, Zeifmans ensures your business stays strong for years to come. Learn more at www.zeifmans.ca or connect with a team member today.
