Overview of Familial Succession Plan for a Student Rental Portfolio

Overview of Familial Succession Plan

For a student rental portfolio consisting of twenty-two buildings each with five units, totaling one hundred ten units, held across six Canadian-Controlled Private Corporations in Ontario, Canada, the goal is to create a tax-efficient familial succession structure that minimizes capital gains taxes. This plan assumes the current owner, for example, a parent, wishes to transfer control and future growth to family members, for example, children, while deferring or reducing capital gains tax exposure. Capital gains taxes in Canada are triggered on dispositions including deemed dispositions at death at a fifty percent inclusion rate increasing to sixty-six point six seven percent for gains over two hundred fifty thousand dollars per year as of June twenty-five, twenty twenty-four, but subject to ongoing adjustments.

Key challenges drawn from the provided documents:

Rental properties are often classified as a "specified investment business" under the Income Tax Act, meaning they may not qualify as an "active business" for the Lifetime Capital Gains Exemption unless each Canadian-Controlled Private Corporation employs more than five full-time employees year-round. If not, the Lifetime Capital Gains Exemption, up to one million two hundred fifty thousand dollars per individual as of twenty twenty-five, cannot be claimed on share dispositions.

The portfolio's structure in six separate Canadian-Controlled Private Corporations adds complexity; consolidation can simplify succession.

At death, shares are deemed disposed at fair market value, triggering capital gains taxes on accrued gains unless deferred.

Ontario-specific considerations include probate fees one point five percent on estate assets over fifty thousand dollars and potential land transfer tax if properties are moved.

Trusts face a twenty-one-year deemed disposition rule, which triggers capital gains taxes on unrealized gains unless mitigated through strategies like distributions or wind-ups.

The most tax-efficient structure, based on the documents, uses an estate freeze combined with a family discretionary trust and a holding company to consolidate ownership. This defers capital gains taxes on future growth to beneficiaries, caps the owner's capital gains tax liability at current fair market value, and allows control retention. Life insurance can fund any unavoidable death taxes. This aligns with Canadian tax rules, for example, sections eighty-five, eighty-six for rollovers; section one hundred seven sub-section two for trust distributions; amended section eighty-four point one under the intergenerational business transfer rules, originally from Bill C-two zero eight but updated effective January first, twenty twenty-four, for intergenerational transfers.