Selling to a third party triggers a capital gain, taxed at the preferential rate, with the lifetime capital gains exemption (LCGE) if the business qualifies. Selling to your child, before 2021, was treated as a dividend — a higher rate, with no LCGE. Bill C-208, and the federal rules refined in 2024, changed that: under conditions, selling to a child can now get the same capital-gain treatment as selling to a stranger, LCGE included.
Two paths have existed since 2024: the immediate transfer, where the child takes control within three years and you step back from management, and the gradual transfer, spread over five to ten years, where you stay involved longer. The first suits a successor who's already ready; the second suits a transition where you're still mentoring your child inside the business. The choice changes which tests the CRA applies, and when it checks that you've genuinely given up control.
The estate freeze remains the complementary tool: it locks in today's value of your shares as fixed-value preferred shares, and shifts future growth to common shares held by the child or a trust. Combined with the right intergenerational transfer path, a freeze can reduce tax at death on top of easing a sale during your lifetime — but it has to happen before the business gains value, not after.
The section 85 rollover often lets you transfer shares at an elected tax value rather than fair market value, deferring tax until the real disposition. Stacking these three tools correctly — intergenerational transfer, freeze, rollover — can mean a difference of several hundred thousand dollars between selling to your child and selling to a stranger. A file of this size gets built years before the handshake.