Late last week, the Federal Government passed Bill C-208 which changed the Income Tax Act of Canada is a positive way for small business owners. It allows small business owners easier access to the Lifetime Capital Gains Exemption on the sale of their shares to the next generation. In the past, for a small business owner to transfer their shares to the next generation was a complicated transaction that frustrated many. Before Bill C-208, it was easier for small business owners to sell to a third party. In order for the new intergenerational transfer rules to work, the following conditions are met:
- The parent’s shares being transferred are shares of a Qualified Small Business Corporation (QSBC), a family farm or a fishing corporation;
- The corporation purchasing the shares is controlled by either the parent’s children or grandchildren, who are at least 18 years of age; and,
- The purchasing corporation must hold the shares for 60 months after purchase and cannot sell the shares other than a death of the shareholder.
While the new rules are welcomed, proper care must be exercised in navigating the rules. For example, Bill C-208 has a provision that reduces access to the capital gains exemption if the taxable capital employed in Canada exceeds $10 million eliminates access where taxable capital is over $15 million. This will limit capital-intensive family businesses that would otherwise enjoy the benefits from this change in legislation.
As part of the process for the intergenerational transfer, the taxpayer must provide CRA with an independent assessment of the fair market value of the shares of the business. As well, an affidavit signed by the taxpayer and by a third party attesting to the disposal of the shares. I am waiting for details on what these two items will need to be.
Bill C-208 also addresses the issue of related party transactions in a family business succession that will allow for an easier transition where there are siblings involved. This will allow for a less complication division of the family business among siblings.
I must say that this change to the Income Tax Act will allow for small business owners who have worked hard to build a business, not only for their retirement but for their future generations, an opportunity to have access to tax provisions that can shelter over $800,000 of capital gains from tax. The access to the capital gains exemption on the transition of their shares to their child or children will allow the business to be kept in the family and not forcing the business owner to sell to a third party.
As always, if you have questions on this new legislation, feel free to reach out any to ANR, we would be happy to discuss what this means to your business, your business strategy and your family.
Until next time,
Jason