Succession Planning for IT Consultants with Family Involved
As an IT consultant, your corporation is more than a tax structure, it’s the foundation of your career and often the main source of family wealth. Whether you run a solo consultancy or manage a small IT services team, one question is often overlooked: what happens to your business when you step back?
For many IT consultants, the plan is to pass ownership to family, a spouse, children, or through a family trust. The challenge is that without proper tax planning, this transfer can trigger a hefty tax bill. In some cases, the CRA’s rules can make it feel cheaper to sell to a stranger than to your own kids.
The good news is that Canada’s tax system now allows family succession to be tax-free, provided you structure it properly. With strategies like the Lifetime Capital Gains Exemption (LCGE), estate freezes, Section 84.1 intergenerational transfer exceptions, and smart use of holding companies with family trusts, IT consultants can protect their legacy and transfer wealth efficiently.
The Tax Challenge for IT Consultants
Under Canadian tax law, when you transfer or gift shares of your IT consulting corporation to family, the CRA deems it a sale at fair market value. That means:
- You could face capital gains tax on the growth of your business, even though you received no cash.
- Historically, Section 84.1 made this worse by reclassifying family transfers as dividends, eliminating access to the LCGE and leading to higher tax bills.
This left many consultants in a strange position: selling to an outside buyer was tax-efficient, but keeping the business in the family was punitive.
Thankfully, legislative reforms in 2021 (Bill C-208) and 2024 (Bill C-59) fixed this inequity, creating new rules for genuine intergenerational business transfers.
Strategy 1: Lifetime Capital Gains Exemption (LCGE)
The LCGE is the foundation of tax-free succession. It allows you to shelter up to $1.25 million (2024 limit) of capital gains on shares of a **Qualified Small Business Corporation (QSBC).
For IT consultants, this means:
- If your corporation qualifies as a QSBC, selling to family could be entirely tax-free.
- Multiple family members can use their LCGE if they own shares directly or through a family trust.
Key requirements:
- At least 90% of your company’s assets must be used in active business in Canada at the time of sale.
- At least 50% of assets must have been active over the last 24 months.
- You must own the shares for at least 24 months.
This is why early planning is essential. If your corporation holds too much cash or passive investments, you may need to “purify” it, moving those assets to a holding company to preserve QSBC status.
Strategy 2: Estate Freezes
An estate freeze locks in today’s value of your IT consulting corporation and shifts all future growth to the next generation.
- You exchange your common shares for preferred shares equal to today’s value.
- Your children or a family trust receive new common shares.
- Any future increase in the company’s value belongs to them.
This way, your eventual tax bill is capped, while your family captures growth. You can also maintain control by holding voting preferred shares.
For IT consultants whose businesses are still growing, an estate freeze prevents your taxable estate from ballooning while still rewarding the next generation.
Strategy 3: Section 84.1 Exceptions (Intergenerational Transfers)
Until recently, family transfers were penalized. Selling shares to your child’s holding company meant dividend taxation and no LCGE.
Under the new rules:
- Immediate transfer: Must be completed within 36 months. You give up control, and your child (or family member) must actively manage the business.
- Gradual transfer: Up to 10 years to transition. Children must remain actively involved, while you phase out ownership.
Example:
An IT consultant sells shares worth $1 million to a child’s holding company.
- Old rules: Taxed as dividends → ~$400,000 tax.
- New rules: Treated as capital gains → $0 tax with LCGE.
The CRA monitors compliance for 3–10 years, so documentation and governance are critical.
Strategy 4: Holding Companies and Family Trusts
For IT consultants, a holding company (Holdco) paired with a family trust can provide powerful succession and estate planning benefits:
- Flexibility: A trust can hold shares on behalf of children, spouses, or multiple family members, spreading tax benefits like LCGE.
- Asset protection: Profits can be moved from your operating IT corporation into a Holdco, reducing risk if clients sue or contracts fail.
- Estate planning: If your children won’t continue the consulting business, the Holdco can hold investments, real estate, or IP, ensuring family wealth is preserved.
- Income distribution: Dividends can be allocated to trust beneficiaries in lower tax brackets, reducing overall family tax (subject to TOSI rules).
This structure is especially useful if your IT consulting business winds down after your retirement, the Holdco and trust continue to protect and distribute accumulated wealth.
The AMT Factor: Don’t Forget the “Tax-Free” Trap
Even when LCGE eliminates regular tax, Alternative Minimum Tax (AMT) can apply.
- On a $1 million sale sheltered by LCGE, you could still owe around $31,000 in AMT.
- AMT is considered a tax prepayment — you can recover it over 7 years, but only if you have sufficient future taxable income.
This means you need a post-sale income plan (dividends, RRSP withdrawals, real estate sales) to recover AMT fully. Without it, “tax-free” could still cost you tens of thousands.
Why IT Consultants Need Early Succession Planning
Succession planning for IT consultants is not one-size-fits-all. You face unique challenges:
- Personal Services Business (PSB) rules: If CRA considers you an “incorporated employee,” you could lose QSBC status and LCGE eligibility.
- Client relationships: Much of your business value is tied to contracts and personal reputation, transferring this requires careful planning.
- Technology valuation: Intangible assets like software or IP can be hard to value, but accurate valuations are critical under CRA scrutiny.
Planning 3–5 years in advance gives you time to purify your corporation, set up a Holdco and trust, and design an AMT recovery strategy.
How Dexado Helps IT Consultants
At Dexado, we combine succession planning expertise with our Ex-CRA Advantage:
- Insider Knowledge: Our principal, Boris Davidkov, is a former CRA auditor. We know exactly how CRA reviews intergenerational transfers.
- Tailored Structures: From Holdcos to family trusts, we design structures that protect wealth and minimize tax.
- AMT Recovery Plans: We create 7-year strategies to ensure you get AMT back in full.
Audit Protection: We prepare valuations, documentation, and compliance monitoring to withstand CRA’s extended audit periods.
Case Study: Alex the IT Consultant
Background:
Alex has run TechPro Consulting Inc. for 20 years. The company is valued at $1,000,000. His daughter Sam is also an IT consultant and wants to continue the business. Alex’s goal is to retire, pass the business to Sam, and avoid a large tax bill.
Step 1 – Preparing the Company (Purification)
Over the years, TechPro accumulated $200,000 in cash and investments inside the operating company. To qualify for the Lifetime Capital Gains Exemption (LCGE), at least 90% of the company’s assets must be active business assets.
- Solution: Alex sets up a Holdco and transfers the $200,000 of passive assets there through a tax-free intercorporate dividend.
- Result: TechPro now qualifies as a Qualified Small Business Corporation (QSBC).
Step 2 – Structuring the Transfer
Sam sets up her own Holdco, which is owned by a family trust. Beneficiaries of the trust include Sam, her spouse, and future children.
- The trust ownership allows income-splitting flexibility and the ability to multiply the LCGE in future if more family members are involved.
Step 3 – The Sale (Using Section 84.1 Exception)
Sam’s Holdco buys Alex’s shares of TechPro for $1,000,000. Payment is structured as a promissory note (Sam doesn’t need cash upfront).
- Old rules: This would have been taxed as a dividend, costing Alex about $400,000 in tax.
- New rules (Bill C-208 / C-59): The sale qualifies as a capital gain, allowing Alex to use his $1.25M LCGE. Regular tax = $0.
Step 4 – The AMT Surprise
Even with LCGE, Alex faces Alternative Minimum Tax (AMT) because 80% of the gain is included in the AMT calculation.
- On the $1,000,000 sale, Alex owes roughly $31,000 in AMT.
- This is not a permanent tax, it’s a prepayment that can be recovered over 7 years if Alex earns enough taxable income.
Step 5 – AMT Recovery Plan
Dexado designs a 7-year recovery plan for Alex:
- Withdraw $50,000 annually from RRSPs, creating taxable income.
- Take eligible dividends from the Holdco as needed.
- Sell a small rental property in year 5, creating additional taxable income.
These steps ensure Alex pays enough regular tax each year to apply the AMT credit and recover the full $31,000.
Step 6 – Paying for the Business
Sam uses TechPro’s profits to declare tax-free intercorporate dividends to her Holdco. Her Holdco uses those dividends to gradually repay the $1,000,000 note to Alex.
- This structure means Alex gets his retirement funds gradually, while Sam controls the business and its cash flow.
Final Thoughts
Succession planning for IT consultants is about more than tax, it’s about protecting your family’s financial future. With LCGE, estate freezes, Section 84.1 exceptions, and the right Holdco-trust structure, you can transfer your business tax-free and preserve wealth for the next generation.
👉 Book a consultation with Dexado today and let’s design a succession plan that works for your IT business and your family.
References
- CRA – Capital Gains Deduction (Line 25400)
- Government of Canada – Budget 2024 (Bill C-59 amendments)
- RBC Wealth Management – Intergenerational Business Transfers
- Onyx Law Group – Estate Freezes in Canada
Disclaimer
This article is for educational purposes only and does not constitute tax or legal advice. Each situation is unique. Please consult Dexado Accounting & Tax or your professional advisor before making succession planning decisions.
