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On January 20, 2026, the Baseball Hall of Fame will announce the results of its voting for its 2026 induction class. While the Baseball Hall of Fame has historically been regarded as the benchmark for all other sports' Halls of Fame, the rampant use of steroids in the late 1990s and early 2000s has garnered significant controversy to the Hall. Case in point: Manny Ramirez, one of the most feared hitters of all time, is on the ballot for his 10th and final time this year, and will almost certainly fail to achieve baseball immortality because of his known steroid usage.
Like baseball, tax planning is a technical sport. While performance enhancers in baseball are frowned upon (even illegal now), tax-planning enhancers as part of an intergenerational succession of a business are welcomed game-changers. With the Hall of Fame top of mind right now, it's prudent to explore how succession planning can create true longevity for your own home team.
Before 2020, the ability for a business owner to sell a business and enjoy capital gains tax rates on the sale was limited to sales of a business to third-party purchasers, with no provision for intergenerational transfers. Further, an individual was only able to monetize the Lifetime Capital Gains Exemption (referred to in this article as the “LCGE”) – a tax incentive introduced to reward Canadians who built Canadian businesses – during their lifetime if the business was sold to a third party. Any removal of cash by an individual from the corporate system following an internal crystallization of the LCGE would have resulted in significant personal taxes.
The LCGE affords an individual in Canada with $1,275,000 of tax-free capital gains in 2026 (without reference to potential alternative minimum taxes) upon a sale of a business provided certain conditions are met. The value of the LCGE could be in excess of $340,000 per person.
In 2020, the Canadian government introduced legislation that allows individuals transitioning a business to the next generation or beyond to take full advantage of both capital gains rates and the LCGE during their lifetimes as though the business was sold to a third party (referred to in this article as the “Succession Enhancers”). Subsequent refinements to the legislation in 2024 ensured that only legitimate intergenerational transitions of a business would be able to take advantage of the Succession Enhancers. One of the main policy reasons behind the recent introduction of these new rules is clear: succeeding a business to the next generation should not attract worse tax outcomes than a sale to a third party.
Taking advantage of the Succession Enhancers typically involves the sale of the individual's shares (or, more commonly, shares eligible for the LCGE for reasons discussed below) to a company owned exclusively by one or more of the individual's children and grandchildren (referred to in this article as “AcquisitionCo”) in exchange for a promissory note in a corresponding amount. Cash from the business would be transferred to AcquisitionCo free of any corporate tax, who would use the cash, over time, to repay the promissory note without incurring any additional taxes to the individual.
To utilize the Succession Enhancers, the following conditions, among others, must be met:
Eligibility for the LCGE
There are a number of conditions that must be met for shares of a company to be eligible for the LCGE. Among these conditions, at least 90% of the company's assets must be used in an active business carried on in Canada upon sale. As a point-in-time condition, it is very common to take steps prior to the sale to “purify” the company and ensure this condition is met.
Transition of Control Requirements
To be eligible for the Succession Enhancers, the individual must either transfer both legal and factual control of the business (distinguishable from the transfer of value of the business) and active management immediately or reduce their involvement in the company and initially transfer legal control of the business while only having to transfer factual control within 36 months (and potentially a portion of their value within 60-120 months).
Active Involvement in Business Going Forward
Not only does the individual have to give up control and active management in the business, but the purchasing children and/or grandchildren must be actively involved in the business.
Notwithstanding the ability for an individual to now access capital gains rates on a sale of the business to AcquisitionCo (and even take advantage of a capital gains reserve for 10 years if structured properly), it is oftentimes undesirable to trigger capital gains above and beyond the LCGE amount as part of the reorganization. As a result, it is common to structure the reorganization to isolate the LCGE-eligible shares, and have the individual sell only those shares to AcquisitionCo as part of the reorganization.
The outcome? Inter-generational business transfers can allow individuals to monetize the LCGE during their lifetimes while deferring capital gains taxes on the balance of their value.
Manny Ramirez hit 555 homeruns over the course of his career, but his legacy will always be tainted with an asterisk. Enhancing a succession plan using these Succession Enhancers is like hitting a grand slam, and without any controversy involved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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