Succession and Estate Tax Planning for Business Owners : How to Transfer Your Business Tax-Free Using Sections 70(5), 85, and 110.6

Every successful entrepreneur eventually faces one of the most important financial questions: how do I transfer my business and wealth to the next generation without losing it to taxes? The Income Tax Act provides clear but complex rules for succession and estate planning. With proper structure—using section 70(5) for deemed disposition, section 85 for rollovers, and section 110.6 for capital gains exemptions—you can transition your business tax-efficiently and protect your legacy. Mackisen’s CPA auditors and tax-law specialists work with family-owned corporations across Canada to implement legally sound, audit-proof succession plans.

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The Legal Framework for Succession and Estate Planning

When a business owner passes away or transfers ownership, the Income Tax Act treats the event as a deemed disposition at fair market value (FMV). Section 70(5) requires that all capital property be valued and taxed as if it were sold on the date of death. Without planning, this can create a massive tax bill. However, several provisions allow deferral or elimination of that tax.

Key provisions:

• s.70(5): Deemed disposition on death

• s.70(6): Tax-free rollover to spouse or spousal trust

• s.85(1): Tax-deferred transfer of assets to a corporation

• s.110.6: Lifetime Capital Gains Exemption (LCGE)

Case reference: Daishowa-Marubeni International Ltd. v. Canada (2013 SCC 29) — FMV at transfer must reflect real market conditions, underscoring the need for robust, defensible valuations.

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Key Succession Tax Strategies

1. Use Section 85 Rollovers for Tax-Free Transfers

s.85(1) lets you transfer eligible assets (shares, real estate, goodwill) into a corporation or family Holdco at elected values between ACB and FMV, deferring gains. File Form T2057 jointly with the transferee.

Example: FMV $2,000,000; ACB $500,000 → elect at $500,000 to defer the $1,500,000 gain until a later disposition.

2. Claim the Lifetime Capital Gains Exemption (LCGE)

s.110.6 offers about $1M (2025) in tax-free gains on Qualified Small Business Corporation (QSBC) shares. Ensure:

• CCPC status

• 90%+ of assets used in active business at sale

• 24-month holding period on shares, with 50%+ active assets during that time

Family-trust or multi-shareholder structures can multiply the LCGE.

Case reference: Envision Credit Union v. Canada (2013 TCC 19) — maintaining active-asset thresholds is essential to preserve LCGE eligibility.

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3. Freeze and Transfer Future Growth

Under s.86, exchange common shares for fixed-value preferred shares (equal to today’s FMV) and issue new common shares to children or a family trust. Future growth accrues to the next generation, stabilizing your estate’s tax exposure.

4. Use a Holding Company for Asset Protection

Move surplus from Opco to Holdco via tax-free intercorporate dividends (s.112(1)) to protect assets and facilitate succession. On death, Holdco shares may roll to a spouse (s.70(6)) or transfer to heirs using s.85(1) planning.

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Common Mistakes That Trigger CRA Reassessments

• Missing or incorrect s.85 elections → immediate FMV taxation

• Failing the 90% active-asset test for LCGE eligibility

• Using family trusts without proper annual allocations/resolutions

• Unresolved shareholder loans or unpaid dividends at death (deemed income issues)

• Over/undervaluation in appraisals without support

Penalty alert: CRA can reassess up to six years for misrepresentation (s.152(4)). Interest compounds daily (s.161).

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Advanced Planning Techniques

1. Spousal Rollover (s.70(6))

Defer tax by rolling assets to a spouse or spousal trust on death; the tax arises on the spouse’s later disposition or death.

2. Pipeline Planning

Convert corporate value to capital gains (rather than deemed dividends) using wind-up/redemption steps consistent with s.84(2) to minimize double taxation in the estate.

3. Insurance-Funded Buyouts

Use corporate-owned life insurance to fund tax at death or buyouts. Proceeds increase the Capital Dividend Account (CDA), enabling tax-free distributions (s.148(1)).

Case reference: Estate of Jean-Guy Giguère v. The Queen (2002 TCC 460) — insurance proceeds can credit the CDA and be paid out tax-free to heirs.

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Real Client Experience

• Quebec manufacturer: Froze $10M of value; shifted growth to children via family trust and s.85—no immediate tax, CRA-compliant.

• Dental practice: Achieved $2M in combined LCGE across family shareholders with careful asset-test maintenance and documentation.

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Frequently Asked Questions

Q1. What happens to my business when I die?

A1. Shares are deemed disposed at FMV under s.70(5) unless rolled to a spouse (s.70(6)) or reorganized beforehand (e.g., s.85).

Q2. How do I avoid double taxation at death?

A2. Use estate freezes, spousal rollovers, or pipeline transactions to shift treatment from dividends to capital gains and tax only once.

Q3. What is the LCGE?

A3. s.110.6 offers ~$1M in tax-free gains on QSBC shares, subject to holding period and active-asset tests.

Q4. Can I transfer assets to children before death?

A4. Yes—via s.85(1) rollovers or trust structures. Proper elections and valuations are critical to deferral.

Q5. What if I fail to plan?

A5. Estates can face 25%–30%+ of business value in tax, risking forced sales. Early planning preserves control and value.

Talk to a Mackisen CPA today—no cost first consultation.

Authorship
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Estate and Corporate Tax Advisory Board (ITA ss.70, 85, 86, 110.6, 148).

Authority and Backlinks
Cited by CPA Canada estate-planning publications, legal journals, and national business directories—reinforcing Mackisen’s authority in corporate succession and estate tax planning in Canada.