Tax at death
Coverage can pay the tax on your shares. Corporate-owned life insurance can also create a Capital Dividend Account credit.
Business Succession Planning
Business Succession Planning for Ontario Owners
Selling to a buyer, your children, your employees or a partner each leads to a different tax result and funding need. Here's how the main rules work in 2026, and where insurance fits.
Your Options
What are the main ways to sell or pass on a business?
There are four common buyers and one planning tool. The right route depends on who you want running the business and what you need from it.
| Main tax rule | Usual funding | Watch for | |
|---|---|---|---|
| Outside buyer | Capital gains exemption, if shares qualify | Buyer's financing | Buyers may prefer assets; the exemption covers shares |
| Family member | Section 84.1 exception, 10-year reserve | Often paid over time | Conditions run for 3 to 10 years |
| Employees | Up to $10 million exemption, 10-year reserve | Often paid over time | You must give up control |
| Business partner | Exemption may apply | Funded buy-sell | Outdated agreement or coverage |
| Estate freeze | Share exchange, generally no immediate tax | Insurance for tax at death | Not a sale; adds family trust rules |
Capital Gains Exemption
How does the lifetime capital gains exemption work?
For 2026, you can generally shelter up to $1,275,000 of capital gains on qualified small business corporation shares over your lifetime. The limit rose to $1.25 million in June 2024 and indexing began in 2026.
Budget 2026 (November 5, 2026) also proposed a separate Canada Growth Incentive exemption of up to $15 million. As proposed, it would apply only to qualifying shares issued from budget day until the end of 2036, not to shares you already hold, and it has its own tests, including a 36-month holding period. It is not law yet, so ask your accountant whether it could matter for a new share issue.
Half of a capital gain is taxable, and the proposed increase in that rate was cancelled in 2025. The exemption belongs to individuals, so each qualifying shareholder has their own limit. Three tests generally apply:
- At the sale90% or more of the company's assets by fair market value are used mainly in an active business in Canada
- For the prior 24 monthsMore than 50% of its assets meet that test
- OwnershipOnly you or a related person owned the shares for those 24 months
Surplus investments can fail these tests, and a life insurance policy counts at its cash surrender value. Past claims and certain investment losses can reduce what's available, and a large claim can trigger alternative minimum tax. A holding company changes how the tests work.
Family Transfers
Can you sell to your children after the section 84.1 changes?
Yes. Since January 1, 2024, a sale to a child's company can generally produce a capital gain rather than a dividend, if it meets strict conditions.
Section 84.1 can treat a sale of shares to a related corporation as a dividend. Bill C-208 created an exception in 2021, and the current rules replaced it with two routes for genuine transfers. Both need qualifying shares, a purchaser company controlled by adult children and a joint election.
Immediate transfer
You give up control at the sale. Within 36 months you hand over management and stop managing, while a child stays actively involved and the business stays active.
Gradual transfer
Legal control moves at the sale, and management generally within 60 months. Within 10 years, your remaining interest must fall to 30% or less of its value at the sale.
The payoff and the catch
A capital gain can use the exemption, and a 10-year reserve can spread the tax. But children who sign the election are jointly liable for your additional tax if the conditions fail.
Employee Ownership
What is an employee ownership trust?
It's a trust that owns the company for its employees. A qualifying sale can exempt up to $10 million of capital gains, and Parliament made that exemption permanent in June 2026.
The trust must take control, and you must deal at arm's length and keep no right or influence that would give you control. All or substantially all of the company's assets must be used in an active business. Sellers can spread the gain over up to 10 years, and the company generally has up to 15 years to recover loans made to the trust to buy the shares.
The exemption has its own conditions, including 24-month ownership and involvement tests and a joint election, and professional corporations are excluded. A later disqualifying event can reverse it or tax the trust.
Selling to a Partner
How does a funded buy-sell work?
A shareholder agreement sets who must buy, who must sell and at what price. Insurance can supply the cash if an owner dies or becomes critically ill.
Without funding, surviving owners may have to borrow or pay the family over time. Life insurance pays only at death, so retirement and disability exits need their own terms. Our buy-sell insurance guide compares the structures.
Estate Freeze
What is an estate freeze?
A freeze fixes the value of your shares today, so future growth goes to the next generation instead of adding to your tax at death.
In general terms, you exchange common shares for fixed-value preferred shares, and children or a family trust hold new common shares. This can generally be done without immediate tax. The trade-offs: professional fees, a deemed sale of a family trust's property every 21 years, tax on split income for family dividends, and tax on your frozen shares at death unless they pass to a spouse.
Where Insurance Fits
How does insurance fund the tax bill or the buyout?
It supplies cash when tax or a buyout falls due, so the family doesn't have to sell the business to pay it. The need comes first, and insurance doesn't replace the plan.
The buyout
A funded buy-sell gives partners the money to buy a deceased owner's shares at the agreed price.
The transition
Key person insurance can help the business if a successor or key manager dies mid-handover.
Also worth raising
Insurance can leave an inheritance for children outside the business. In a holding company structure, which company owns the policy matters.
Who It Fits
Who should start now?
- Owners within 10 years of an exitTime for the tests and the funding
- A family successorA child ready to take real control
- Partners without fundingAn agreement with no insurance behind it
What to Weigh First
When it may not fit
Shares that won't qualify
Investments in the company, or a buyer who wants assets, can rule out the exemption.
No willing successor
The family rules need a child who really takes over.
A late start
The 24-month tests can't be fixed in a few weeks.
How We Work With Your Advisors
Your accountant and lawyer lead
We don't prepare tax opinions, shareholder agreements, wills or reorganizations. We coordinate with your advisors and handle the insurance.
You set the goal
Who owns the business next, and what you need from it.
Your advisors design it
They confirm the structure, price and wording.
We arrange the insurance
We handle the coverage, insurer and paperwork.
Common Questions
Questions owners ask about succession
$1,275,000 of gains on qualified small business corporation shares. That's a $637,500 deduction, because half of a capital gain is taxable. The limit is indexed.
Each individual has their own limit, so a spouse who owns qualifying shares can generally claim it. Your accountant should review the ownership well ahead.
Generally no. It applies to shares an individual sells. In an asset sale, the corporation is the seller.
No. Legislation passed on June 18, 2026 removed the end date. The conditions still apply.
They're generally treated as sold at fair market value, unless they pass to a spouse or common-law partner, so the estate can owe tax on an asset that's hard to sell.
Related Guides
Strategies that often work together
This information is general in nature and is not tax, legal, accounting, insurance or investment advice. It is based on current Canadian tax legislation, which can change. Any strategy should be designed and reviewed with your accountant and legal advisors based on your circumstances. Values above the policy guarantees, including dividends, are not guaranteed.
Business succession planning in Burlington, Oakville, Milton, Mississauga and Hamilton
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