It is good news for small family businesses, including farming and fishing enterprises, following the passing of Bill C-208. This Act proposes amendments to the Income Tax Act so that there are better tax terms when it comes to the intergenerational transfer of shares for qualifying corporations. The Bill has been approved by the Senate and House of Commons, leaving just Royal Assent before it becomes law.
Currently, families wanting to pass on their businesses to the next generation have had to endure significant tax costs under sections 55 and 84.1 of the Income Tax Act. These tax implications have meant that selling off the business to third parties, or at arm’s length, has made more economic sense than having it inherited within the family. Many view this as a penalty for keeping the business within the family.
When families sell the business to third parties, the appreciation in the value of the company may be considered a capital gain for tax purposes that qualifies for the lifetime capital gains exemption. This can exempt the selling parent from regular income tax on the sale. Selling to family however makes gains recognised as dividends, which nullifies the capital gains exemption. A higher dividend rate is applied, though the amount will depend on the type of dividend, the province they live in, and overall income.
Bill C-208 is expected to correct this problem. It will allow a parent selling shares of their corporation to a corporation controlled by their child or grandchild to avoid punitive dividend treatment and allow them to tap into capital gains exemptions on the sale. If the purchaser corporation however disposes of the shared within 60 months of acquisition, the exemption may no longer apply.
Nevertheless, family business owners across the country are expected to welcome the news of this reform that would see more seniors able to retire in comfort, knowing they can leave their businesses to family without the negative after-tax implications.
Under the changes, the parent will need to provide the Canada Revenue Agency (CRA) with an independent assessment of the fair market value of the shares intended to be transferred. The CRA has however not detailed what would make for such an independent assessment. The Bill has also not clarified when these changes can be expected to go into effect. The government is however to introduce legislation that would confirm that the amendments are to apply as from the next taxation year beginning January 1, 2022.