Updated Checked by the Tax-Services.ca editorial team How we check
Succession planning for a Canadian business comes down to one tax question: who ends up owning the shares, and when do they pay for them? Sell to a stranger, hand the business to a child, or die owning it, and the tax bill is different each time. The lifetime capital gains exemption, about ,275,000 in 2026 ($1,250,000 in 2025), can wipe out much of it if the shares qualify.
What does succession planning mean for your accounting?
Most of the work is tax, and most of the tax is capital gains. A gain is the sale price (or the value the tax rules assume) minus what the shares cost you, and half of it is added to your income. The accounting side is making sure you can prove both numbers.
That means clean books for several years, a share register that matches the corporate filings, and a value someone other than you can defend. Buyers and the CRA both ask for these. A plan built on a guess of value tends to fall apart at the first question.
Who can use the lifetime capital gains exemption?
You, if you’re a Canadian resident with gains on qualified small business corporation shares or qualified farm or fishing property, and you have exemption room left. The CRA’s capital gains guide gives the limit as about ,275,000 for 2026 ($1,250,000 for 2025), which is a $637,500 deduction for 2026 because only half of a gain is taxable. Check Form T657 for your own figure.
The share test is strict. Over the 24 months before the sale, the shares must be owned only by you or people related to you, and the company must be a Canadian-controlled private corporation with more than 50% of its assets used mainly in an active business in Canada. There’s also a test on the day of sale. We haven’t confirmed the exact asset percentages on that day, so read the CRA’s capital gains guide for the year.
| Item | Figure |
|---|---|
| Lifetime exemption, 2026 (2025: $1,250,000) | about ,275,000 |
| Deduction that gives (half of gain) | $637,500 (2025: $625,000) |
| Holding test on the shares | 24 months |
| Asset test over that period | More than 50% active business assets |
| Form to claim | T657 |
What happens if the buyer is your child?
Since January 1, 2024, the tax rules for selling shares to your own child’s company have a defined route. You choose between an immediate transfer, which relies on terms like an arm’s length sale and a three year test, and a gradual transfer that looks like an estate freeze and runs five to ten years. You elect on Form T2066, which the CRA lists as the election for an immediate or gradual intergenerational business transfer.
The definition of “child” is wider than you’d think. It reaches nieces, nephews and their spouses and children. Before 2024 a sale to a family company could turn a capital gain into a taxable dividend, and this route exists so that it doesn’t.
The details of each test are long, and the T2066 page doesn’t explain them. Read the Finance Canada notes on the rules before you sign anything.
How much tax does a sale cost without the exemption?
Take a $400,000 gain in Ontario for an owner with no other income that year. Using the same maths as our capital gains tax calculator, the extra tax is $64,721.98, about 16.2% of the gain. The calculator applies the lifetime exemption only when you tick the box for qualified property, so a qualifying sale can cost far less.
That gap is the reason to test your shares against the rules years before you sell. A company that piles up cash and investments can fail the asset test, and cleaning that up takes time.
Profit in the company matters too. On $150,000 of active business income the corporate tax calculator shows $17,544 of tax in Ontario for a calendar 2026 year, leaving $132,456 in the company. Whatever you pay out is taxed again, which the dividend tax calculator estimates.
What if the owner dies before the plan is done?
The CRA treats a person who dies as having sold everything they own just before death, at fair market value. The gain lands on their final return. If the shares go to a surviving spouse or common-law partner, the gain can be postponed, provided the property is locked in for them within 36 months of death. The legal representative can also elect out of that rollover, property by property.
Probate is a separate cost. The estate administration tax calculator shows the Ontario fee on an estate.
Mistakes that undo a succession plan
Waiting until the buyer appears. Shares that fail the 24 month test can’t be fixed in a month.
Assuming the exemption is automatic. You claim it, on a form, and it covers gains only up to your limit.
Forgetting the family. A child who doesn’t want the business, or a sibling who was promised something else, turns a tax plan into a family argument.
Where should you start with succession planning?
Begin with three plain questions. Who might take over, and do they know it? What would the shares sell for to an outsider? What would the tax bill be on that number, with and without the exemption? You can sketch the first and third with the calculators above, but the value needs someone independent.
Then sit down with your accountant and a lawyer, in the same meeting if you can. The accounting, tax and legal sides pull on each other, and fixing one without the others is how plans stall.
Common questions about succession and tax
How early should I start? Three to five years before you want to step back is a sensible window, because the 24 month ownership test and any clean-up of the company’s assets take time.
Does the exemption apply to a rental property company? Not as a rule. The company has to run an active business, and passive rental holdings generally don’t qualify. Check the shares against the CRA tests before you plan on it.
Where we got these figures
The exemption limit, the share tests and the death rules come from the Canada Revenue Agency and the Department of Finance Canada. The intergenerational transfer rules come from Finance Canada’s explanatory notes. Example figures come from our calculators using 2026 Ontario and federal data. The lifetime capital gains exemption is about ,275,000 for 2026. This site is independent of both departments.
Frequently asked questions
What is the lifetime capital gains exemption?
A deduction for gains on qualifying small business shares and farm or fishing property. The CRA gives the limit as $1,250,000 for 2025, a $625,000 deduction.
How long must I hold shares to qualify?
Over the 24 months before the sale, only you or related people may own them, and the company must meet the asset test.
Can I sell my business to my child tax efficiently?
Since January 1, 2024 there are two routes, an immediate transfer and a gradual one, elected on Form T2066.
What happens to my shares when I die?
You're treated as selling them at fair market value just before death. A spousal rollover can postpone the gain if conditions are met.
What form claims the exemption?
Form T657, Calculation of Capital Gains Deduction.
- Self-employed taxes in Canada: income, CPP and GST
How tax works when you are self-employed in Canada: reporting income and expenses, paying both halves of CPP, instalments and when to register for GST