The government is fixing laws that would have penalized the passing on of a family business like a farm to the children of the business owner. CNS photo/Bob Roller

Tax relief for transfer of family businesses

By  Anthony Cusimano and thomas Bang, Catholic Register Special
  • November 7, 2021

Given the large number of aging baby boomers, the next 10 years will see a dramatic increase in intergenerational transfer of wealth. Many business owners have worked their entire lives and have a significant portion of their net worth tied up in these businesses.

When an individual sells shares in a family business corporation to a non-related purchaser, the vendor can benefit from an “enhanced capital gains exemption” to shelter the capital gain from being taxed. This capital gains exemption limit is indexed to inflation: For 2021, this limit is $892,218 which equates up to approximately $240,000 of tax saving for an Ontario taxpayer at the top marginal tax bracket. If there are multiple shareholders (for example, husband and wife), the tax savings could multiply as the capital gains exemption is available with respect to each vendor.

However, up until June 2021, such utilization of the capital gains exemption was significantly restricted if a purchaser (corporation) was related to the vendors.  While the restriction was designed to prevent a taxpayer from extracting corporate surplus from a transaction involving the related person’s use of the capital gains exemption, it unintendedly made it more tax advantageous to sell your family business to a stranger rather than passing it on to the next generation.

On June 29, 2021, a federal private member’s bill (Bill C-208) was legislated to provide the same treatment on sale of shares to family and non-family members, in limited circumstances. The intent is to grant relief on genuine intergenerational share transfers to related family members and hence to allow for the enhanced capital gains exemption to be utilized. As it stands, such relief is available where:

  • The shares are that of “qualified small business corporation” (“QSBC”) or family farm or fishing corporation;
  • The purchaser (corporation) is “controlled” by one or more children or grandchildren (aged 18 or older) of the vendors; and
  • The purchaser (corporation) does not dispose of the exchanged shares within 60 months of the purchase.

It is also worth noting that the relief is targeted to small businesses and any corporation (or associated corporations) with a taxable capital of $10 million will provide reduced capital gains exemption limit to the selling shareholders.

Bill C-208 contains several uncertainties and opens for potential abuse in non-genuine intergenerational transfer of shares.

Accordingly, the Canada Revenue Agency has indicated it will review the rules and make further changes to clarify and tighten them after Nov. 1, 2021. Nevertheless, Bill C-208 undoubtedly will provide benefits to many business owners who are looking to transfer them to the next generation.

As mentioned, the shares must be the shares of QSBC at the time of sale. Among other things, throughout the two-year period prior to the sale, the shares must be held by the related persons and the assets of the corporation must be principally used in an active business carried on in Canada. Accordingly, it may require some pre-sale tax planning in order to benefit from this new rule.

(Anthony Cusimano, CPA, is a Partner and Thomas Bang, CPA is a Tax Principal in Williams & Partners, LLP, Markham, Ont. Each has several years’ experience in estate planning matters.)

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