Selling Your Business to Your Child: Section 84.1 Tax Calculator

The Same Shares, Two Very Different Tax Results

You have built a company. A stranger offers to buy your shares through his holding company, and the result is a capital gain, half of it taxable, and the lifetime capital gains exemption available against it. Your daughter offers exactly the same price through exactly the same kind of holding company, and section 84.1 can convert most of the proceeds into a deemed dividend, taxed as ordinary dividend income, with no exemption available against any of it.

That asymmetry is the single fact most owner-managers arrive not knowing, and it is the reason a family succession that looks affordable on the surface sometimes does not happen at all. The calculator above puts the two outcomes side by side on your own numbers so the size of the gap is visible before anything is signed. Everything on this page sits inside our wider tax planning work, because a transfer of this kind is a planning exercise carried out over months, not a document signed at a closing.

What Section 84.1 Actually Does

Section 84.1 applies where an individual resident in Canada disposes of shares of a corporation resident in Canada to another corporation, the individual does not deal at arm’s length with that purchaser corporation, and the subject corporation is connected with the purchaser corporation immediately after the disposition. Related persons are deemed by subsection 251(1) not to deal at arm’s length, and a child, grandchild, sibling, parent and spouse are all related persons.

Where the provision applies it does two things. Paragraph 84.1(1)(a) grinds the paid-up capital of any shares the purchaser corporation issues to you as consideration, so that the paid-up capital you can later extract tax free is limited. Paragraph 84.1(1)(b) deems a dividend to have been paid to you, equal to the non-share consideration you received to the extent it exceeds the greater of two amounts: the paid-up capital of the shares you sold, and their adjusted cost base as specially computed.

Non-share consideration is usually called boot. Cash at closing is boot. A promissory note from the holding company is boot. Debt of yours that the holding company assumes is boot. Because a family buyer almost always pays with a note rather than shares, the boot in a family transfer tends to be the whole purchase price, which is exactly the case in which the deemed dividend is largest.

Hard ACB, and Why an Old Crystallisation Does Not Help

The adjusted cost base used inside the section 84.1 formula is not your ordinary adjusted cost base. Paragraph 84.1(2)(a.1) reduces it by amounts previously claimed under the capital gains exemption in section 110.6, whether claimed by you or by a person not dealing at arm’s length with you, and by any pre-1972 valuation-day increment. What is left is commonly called hard ACB.

This is the trap. A great many owner-managers were advised years ago to crystallise the exemption, triggering a gain on paper to step the adjusted cost base up while the exemption room was available. That step-up is real for an arm’s length sale. It is stripped out entirely for section 84.1 purposes. If you crystallised half a million dollars of exemption in 2016 and believed you had protected that amount against a future family transfer, the calculator will show you that you have not, and you should be told that now rather than at closing.

Hard ACB is therefore worth modelling as its own line rather than as a footnote to the adjusted cost base, which is why the calculator asks for the exemption already claimed and the valuation-day increment as separate inputs. Where the amount previously claimed equals or exceeds the ordinary adjusted cost base, hard ACB falls back to the paid-up capital floor and the deemed dividend is close to the entire purchase price.

Bill C-208, Budget 2023, and What Changed

Parliament has legislated in this area twice in recent years, and the sequence matters because advice given before each change can now be wrong.

Bill C-208 received royal assent in 2021 and added an exception in paragraph 84.1(2)(e) for qualifying transfers of qualified small business corporation shares and family farm or fishing corporation shares to a corporation controlled by the taxpayer’s adult child or grandchild. It was a private member’s bill, it was widely criticised as drafted too loosely, and the Department of Finance said almost immediately that it would be revisited.

Budget 2023 proposed a replacement, and the legislation enacted in Bill C-59 put in place a tightened framework for what is described as a genuine intergenerational business transfer. It offers two elective routes, an immediate transfer route tested over a period of roughly thirty-six months and a gradual transfer route tested over a considerably longer period of up to about ten years. Both require a joint election by you and the purchaser corporation, both extend the normal reassessment period so the conditions can be tested years after closing, and both impose joint and several liability between you and your child’s corporation for tax that arises if the conditions fail. The tightened rules apply to transfers occurring on or after 1 January 2024.

The Two Elective Routes and What They Ask of You

The two routes differ in how quickly you have to let go. Broadly, the immediate route contemplates a prompt and substantially complete handover of control and of economic interest, tested over a shorter window. The gradual route allows the handover to be staged, and in exchange the testing period runs much longer, so the transaction stays open to reassessment for far longer.

Both routes are built on the same underlying idea, which is that the child must genuinely take over. Control has to move. The child has to remain actively engaged in the business. You have to step back rather than continue to run the company while your child holds the paper. Where the substance of the arrangement is that nothing really changes, the exception is not intended to be available, and the extended reassessment period exists precisely so the CRA can look at what actually happened rather than what was documented.

Whether the Exemption Survives

The lifetime capital gains exemption in section 110.6 shelters a capital gain on qualified small business corporation shares. It does not shelter a deemed dividend, because a deemed dividend is not a capital gain. Neither does the one-half inclusion rate in paragraph 38(a). This is why the two columns in the comparison table can differ by so much on identical facts: one route runs the proceeds through a provision that halves the income and then exempts a large slice of it, and the other route taxes the same money as ordinary dividend income in full.

Two further points are worth raising before you rely on an exemption claim. The shares have to be qualified small business corporation shares, which brings in the twenty-four month holding requirement and the asset use tests in subsection 110.6(1), and a company carrying surplus cash or passive investments may fail those tests without any purification work. And a large claim under section 110.6 can attract alternative minimum tax, which this calculator does not compute but which can turn an apparently tax free gain into a real cash cost in the year of sale. If you are weighing a share sale against an asset sale, the share sale against asset sale calculator takes that comparison further, and where a family trust holds shares the family trust exemption multiplication calculator looks at spreading the claim across beneficiaries.

What the Arithmetic Usually Shows

On typical family transfer facts the gap between the two routes is not marginal. Where the boot is the full purchase price and hard ACB is low, the deemed dividend approaches the whole consideration and is taxed at your dividend rate, while the capital gain route halves the income and then applies the exemption to what is left. The difference is frequently large enough to decide whether the sale happens at all, or whether the price has to come down so the child can fund the tax.

That is why the structure is worth designing before terms are agreed rather than after. There are ordinary planning responses to consider, including how much of the price is paid in shares rather than notes, whether a section 85 rollover or a freeze belongs in the sequence, whether the purchaser corporation is the right vehicle at all, and whether the buyer should hold the shares personally. Each of those choices has consequences well beyond section 84.1, and the corporate capital gains tax calculator and the multiple share classes calculator cover two of the pieces.

What This Calculator Does Not Cover

• The qualified small business corporation tests in detail, including the twenty-four month holding period, the asset use tests and any purification the company needs first
• Section 85 rollovers and estate freezes, which frequently belong in the sequence before or instead of a sale
• Family trusts and exemption multiplication, where more than one beneficiary could claim against the same gain
• The alternative minimum tax computation under Division E.1, which a large exemption claim can trigger
• The general anti-avoidance rule in section 245, which can apply to a transaction that meets the letter of an exception
• Earn-outs, promissory note terms and interest, including how a note is taxed as it is repaid and what happens if it is not
• Provincial differences outside Ontario in personal rates and in corporate law requirements for the transfer
• Non-resident vendors or non-resident children, where section 116 and the residence conditions change the analysis entirely
• Family farm and fishing corporation specifics, which have their own definitions and their own history under these provisions
• Whether the conditions of any exception are in fact met, which is a legal determination on the current text of the Act