Tax Relief

Tax relief when transferring household companies

Given the large number of aging baby boomers, the transfer of wealth between generations will increase dramatically over the next 10 years. Many entrepreneurs have worked their entire lives and tied up a significant portion of their net worth in these businesses.

If an individual sells shares in a family business company to an unaffiliated buyer, the seller can benefit from an “extended capital gain exemption” to protect the capital gain from taxation. This capital gains exemption limit is inflation-indexed: for 2021, this limit is $ 892,218, which corresponds to a tax saving of approximately $ 240,000 for an Ontario taxpayer in the highest marginal tax bracket. If there are several shareholders (e.g. husband and wife), the tax savings can multiply since the capital gains exemption is available to every seller.

Until June 2021, however, the use of the capital gains exemption was considerably restricted if an acquirer (corporation) was connected to the sellers. While the restriction was aimed at preventing a taxpayer from drawing a business surplus from a transaction in which the connected person availed of capital gains exemptions, inadvertently made it more tax beneficial to sell your family business to a stranger rather than to sell it to to pass on to the next generation.

On June 29, 2021, a federal private member bill (Act C-208) was passed to provide equal treatment in certain circumstances when selling shares to family and non-family members. The intention is to facilitate the transfer of real shares between the generations to close family members, thus enabling the benefit of the extended exemption from capital gains. As things stand, such relief is available if:

  • The Shares are those of a “Qualifying Small Business Company” (“QSBC”) or a family farm or fishing company;
  • The buyer (company) is “controlled” by one or more children or grandchildren (aged 18 or over) of the seller; and
  • The acquirer (company) does not dispose of the exchanged shares within 60 months of the acquisition.

It’s also worth noting that the relief is aimed at small businesses, and any company (or affiliate) with taxable capital of $ 10 million will grant selling shareholders a reduced capital gains exemption.

Bill C-208 contains several uncertainties and potential misuse in the spurious transfer of shares between generations.

Accordingly, the Canadian tax authorities have announced that they will review the rules and make further changes after November 1, 2021 to clarify and tighten them. Still, Bill C-208 will no doubt benefit many business owners who wish to transfer it to the next generation.

As mentioned earlier, the shares must be QSBC’s shares at the time of sale. Among other things, the Shares must be held by related parties for the two year period prior to sale and the Company’s assets must be used primarily in an active business conducted in Canada. Accordingly, some pre-sale tax planning may be required to benefit from this new rule.

(Anthony Cusimano, CPA, is a partner and Thomas Bang, CPA is a tax principal at Williams & Partners, LLP, Markham, Ontario. Each has several years of estate planning experience.)

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