As a small business owner, you may have heard about some of the recent changes to our Canadian tax laws that stem from Bill C-208, a private member’s bill that passed in the House of Commons recently. The bill, which was granted Royal Assent on Tuesday, June 29, has been celebrated by small business owners and their advisors, however it has received significant pushback from the government and its Department of Finance.
As written, Bill C-208 amended Canada’s Income Tax Act (ITA) to offer tax relief to families who intend to transfer shares of small businesses or family farms and fishing corporations to their children. Previously, parents selling qualified small business corporation shares (QSBCS) or a qualified farm or fishing property (QFFP) to an arm’s length (unrelated) corporation were able to use the lifetime capital gains exemption (LCGE) to reduce their income tax owed on the resulting capital gain on the sale. However, if the shares were sold to a non-arm’s length (related) corporation, such as a corporation owned by the parent’s children, for cash or a promissory note, the parents would not have a capital gain and could not use the capital gains exemption. This resulted in significant income tax consequences.
The changes enacted in Bill C-208 attempt to level the playing field and ease this problem by allowing a sale to non-arm’s length purchasers of the shares to result in a capital gain and the ability to use the capital gains exemption to reduce the income tax owed. The new rules require that the purchaser corporation be controlled by one or more children or grandchildren, aged 18 or older, and that the purchaser corporation does not dispose of the purchased shares within 60 months of the purchase. An independent assessment of the fair market value of the shares must be provided to the CRA, together with an affidavit signed by the vendor and a third party attesting to the disposal of the shares. In addition to these changes, the bill also enacts changes that will make corporate reorganizations of family-owned businesses easier.
While the Department of Finance attempted to delay the implementation of Bill C-208 until 2022, the department later clarified in a press release on July 19, 2021 that the provisions of the bill can be used immediately to facilitate intergenerational transfers of shares of small businesses or family farm and fishing corporations. However, the Department of Finance has indicated that it plans to amend the bill in the future to ensure that it is used only for the legitimate transfer of family-owned businesses, and not for artificial tax planning or “surplus stripping” purposes.
The Department of Finance has stated it intends to address the following issues in future amendments:
- The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild
- The level of ownership in the corporation carrying on the business that the parent can maintain for a reasonable time after the transfer
- The requirements and timeline for the parent to transition their involvement in the business to the next generation
- The level of involvement of the child or grandchild in the business after the transfer
If you own a family business, farm, or fishing corporation, and are wondering how Bill C-208 will affect the intergenerational transfer of your business, we suggest speaking with your trusted tax professionals right away to better understand your best course of action.
Learn more about passing on the family business here.