On July 19, the Department of Finance confirmed that the provisions previously announced under Bill C-208 can now be used to enable intergenerational transfers of shares of small businesses, family farm, and fishing corporations. These provisions serve to level the playing field for family businesses looking to transition their business to the next generation.
In the past, under Canada’s Income Tax Act, business owners who sold shares of their business to a company owned and controlled by their children or grandchildren were taxed at a much higher tax rate than if they had sold shares of their business to a third-party purchaser at arm’s length. The sale of shares to a third-party purchaser was generally considered a capital gain, which often resulted in business owners being eligible for the lifetime capital gains exemption. If shares were sold to a corporation controlled by a family member, the lifetime capital gains exemption was not an option.
The instance described above essentially punished business owners in the form of a tax penalty for trying to keep the business in the family. Fortunately, with the passing of Bill C-208 into law, this restriction is no longer in effect. Bill C-208 now levels the playing field regarding the sale of shares of a small business, family farm, or fishing corporation to a company controlled by the next generation in the family.
The amended provisions within Bill C-208 now considers the family business owner’s child or grandchild as being at arm’s length if the following conditions are met:
Senior officials from the Department of Finance have stated the federal government intends to introduce legislation to make the ruling effective as of January 1, 2022. However, Canada’s Finance Minister, Chrystia Freeland overruled this decision, ruling that Bill C-208 is in effect now.
Concerns over the bill have been raised as the draft legislation is thought to be too broad, lacking in necessary safeguards needed to ensure genuine intergenerational transfers. Although the legislation may not be impeccable, it serves as a great start for many family business owners across the country looking to keep the business in the family.
Not having to worry about how the differences in after-tax income might affect a family business owner when deciding to pass their business on to the next generation, business owners are now able to better plan for their retirement.
If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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