Bill C-208, Section 85 and the LCGE: Planning a Family Business Transfer
Information checked as of November 10, 2026. All amounts are in Canadian dollars.
Passing a business to the next generation involves three separate tax questions: Will the seller receive capital-gain treatment? When will the gain be recognized? How much of an eligible gain can the lifetime capital gains exemption (LCGE) shelter?
The intergenerational transfer rules, a section 85 rollover and the LCGE answer different parts of that planning problem. Coordinating them can help a family structure a succession, but none automatically guarantees a tax-free transfer.
Bill C-208 was the starting point
Bill C-208 introduced relief in 2021 for certain transfers of business shares to a corporation owned by the next generation. Bill C-59 subsequently replaced the original conditions with the genuine intergenerational business transfer regime for dispositions on or after January 1, 2024. Current planning must use those rules, including subsequent amendments. [1]
The underlying issue is section 84.1. A Canadian-resident individual selling shares to a non-arm's-length corporation can face a deemed dividend, depending on the ownership relationship and consideration received. [12] The LCGE cannot shelter a dividend. A qualifying intergenerational transfer can provide an exception, allowing an otherwise eligible capital gain to be considered for the exemption. [2]
The handover must be genuine
The seller must be an individual other than a trust, the shares must qualify, and the purchaser corporation must be controlled by one or more qualifying children aged 18 or older. The statutory definition of child also covers certain other family members; it does not include every relative. [3]
Both transfer routes require the parent to give up legal control at closing. The immediate route also requires giving up factual control. Both generally require disposal of remaining equity other than qualifying non-voting preferred shares within 36 months, with additional ownership restrictions applying from closing. [2]
Immediate transfer: Child control, active participation and continued active-business conditions generally run for 36 months.
Gradual transfer: Those conditions run until the later of 60 months and the final sale time. Within 10 years, retained parent/spouse debt and equity must generally fall to no more than 30% of their pre-transfer interest value for a QSBC transfer, or 50% for a qualifying farm or fishing corporation transfer.
These are selected conditions, not a complete eligibility checklist. [2]
Reasonable steps to transfer management and permanently cease managing must be taken by 36 months for the immediate route or 60 months for the gradual route, subject to a longer reasonable period. Advice can continue without necessarily constituting management. Current rules also allow active involvement to be established on the facts; averaging 20 hours per week is not the only qualifying route. [4]
What a section 85 rollover does
Section 85(1) can defer all or part of a gain when eligible property is transferred to a taxable Canadian corporation for consideration that includes shares. The transferor and corporation jointly choose an elected amount, subject to statutory limits. Cash, a promissory note or other non-share consideration can affect the minimum amount. [5]
A full rollover at tax cost generally produces no immediate capital gain, so there is no gain from that transfer against which to claim the LCGE. An elected amount above tax cost can recognize a gain, sometimes called crystallizing the exemption, if the separate LCGE requirements are satisfied. [13] [7]
Section 85 does not override section 84.1. Tax cost, paid-up capital, the payment mix and the family-transfer exception must be reviewed together. An LCGE claim does not automatically create an equal amount that can be withdrawn from a corporation without dividend tax. [2] [5]
A simple rollover example
Assume eligible shares have a fair market value of $1,000,000 and an adjusted cost base of $100,000. Consider a valid section 85 exchange solely for shares, with no transaction costs:
Elect $100,000: The immediate capital gain is generally nil. No LCGE is used on that transfer.
Elect $600,000: The capital gain is generally $500,000 before any exemption. Whether the LCGE can shelter it requires a separate eligibility and limit calculation.
This illustrates the elected amount only. It does not establish that a particular succession qualifies under section 84.1 or that cash can later be extracted tax-free.
The 2026 LCGE: eligibility comes before the limit
The LCGE limit for 2026 is $1,275,000 of qualifying capital gains. That is a lifetime ceiling before prior claims and other limitations, not a $1,275,000 tax saving. The increase to $1.25 million for qualifying dispositions after June 24, 2024 has been enacted, with inflation indexation resuming in 2026. [11] [6]
For most incorporated small businesses, the focus is qualified small business corporation (QSBC) shares. The tests generally include:
At sale: The corporation must qualify as a small business corporation: a Canadian-controlled private corporation with all or substantially all of its asset value in qualifying assets. These generally include assets used principally in an active business carried on primarily in Canada, qualifying shares or debts of connected corporations, or a combination. CRA generally interprets this threshold as 90% or more.
During the preceding 24 months: The applicable Canadian-controlled private corporation and more-than-50% qualifying-asset tests must be met.
Ownership history: The shares must satisfy the 24-month ownership rules, including special rules for newly issued or substituted shares.
Excess investment assets or cash not needed in the business may require advance planning. A corporation selling its operating assets is a different transaction from an individual selling qualifying shares; the shareholder's LCGE does not directly exempt the corporation's asset-sale gain. [7]
Prior exemption claims, cumulative net investment losses, certain business investment losses and alternative minimum tax (AMT) can affect the outcome. A qualifying gain can therefore still create a current cash-tax cost. [7] [10]
Two elections, different responsibilities
T2057 is the joint section 85 election by the transferor and the corporation. Its deadline is generally the earliest tax-return filing deadline of the parties for their taxation years containing the transfer. [8] [5]
T2066 concerns the intergenerational transfer exception. The seller and each child in the purchaser's controlling group must complete the joint election by the seller's filing deadline. Follow the current CRA form instructions, which presently direct taxpayers to retain the completed form in their records. Continued compliance matters: electing children can share liability for additional tax if the conditions fail. [3]
Start with the family's succession plan
Before signing, establish a supported business valuation, review the share and asset history, calculate available LCGE room and AMT, and map the parent's retirement funding against the child's capacity to pay. Document who will control and manage the business, when duties will change and how ongoing conditions will be monitored.
KKL CPA can help review how the transfer structure, section 85 election and LCGE fit your circumstances. Contact our team to discuss a family business succession.
This article provides general information, not advice for a specific transaction. Tax and legal advice should be coordinated before implementation.
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