The immediate transfer regime under the intergenerational transfer (IGT) rules found in subsection 84.1(2.31) will not provide a safe harbour from section 84.1, if the taxpayer-vendor at any time after the sale, either alone or with a spouse, has de facto control of the target corporation. (The gradual IGT regime under subsection 84.1(2.32) prohibits only legal control by the vendor or vendor and spouse.) Will the vendor have de facto control where he or she takes back a large note payable over time that is guaranteed by the child-shareholder of buyco? Would the answer to this question change if the note were a demand note?
The CRA, in technical interpretation 2024-1038891E5 (February 18, 2025), referred to paragraph 23 of IT-64R4, which states that a large debt of a corporation that “may become payable on demand” and a family member who is a shareholder or creditor of the corporation are both relevant to a determination of de facto control. The CRA stated that whether a note confers de facto control would depend, in part, on whether it gave the vendor “influence” over corporate-decision making, which in turn would depend on other factors such as “[t]he relative portion of the financing of the purchaser corporation represented by the [note], the terms of repayment, any obligations/guarantees relating to repayment, and the access that the purchaser corporation has to alternative financing in the event a demand for payment is made.” The CRA went on to say that
a non-interest-bearing promissory note payable over a commercially reasonable period of time would not, in itself, provide the holder with the type of influence that is indicative of de facto control [and] a personal guarantee of the amount owing under the [note], would not, where the purchaser corporation has the capacity to make the scheduled payments under the promissory note (and absent any other factors indicative of de facto control), result in the holder having de facto control of the purchaser corporation.
Philip Friedlan and Adam Friedlan “Intergenerational Transfers: Does the Issuance of a Promissory Note Result in De Facto Control?” 25:4 Tax for the Owner-Manager (October 2025)
