For decades, income tax legislation has made it difficult to sell your small business or family farm to a family member and still get concessional tax treatment for the seller. Under legislation that previously stood, if you sold your business to an arms’ length party, you could potentially get concessional capital gains tax treatment, but if you sold your business to a family member using a common holding company structure, you couldn’t. Bill C-208 attempts to address this anomaly.
Generally, sellers tend to be more interested in selling shares as they want to potentially access $892,218 as their lifetime capital gains exemption if they sell shares in qualifying businesses. If a capital gain is realized beyond that threshold, an individual is taxed at capital gains tax rates which are lower than dividend and employment income tax rates.
What are the significant changes?
The new rules aim to level the playing field for business owners attempting to transition their company to the next generation. There are certain requirements to ensure you meet the rules. The most significant are:
- children who are 18 or older may buy your shares through a company they control.
- the purchasing company needs to hold those shares in the business being transitioned for at least 5 years after purchase.
- an independent valuation of the shares sold needs to be done.
- if a large company is sold – more than $10mil in taxable capital – the seller may not receive their lifetime capital gains exemption. The new rules are designed to benefit “smaller” businesses.
What can I do now?
The Department of Finance is proposing amendments to Bill C-208 by November 2021, so there could well be changes to come. As yet, we’re not sure what the exact timing will be and don’t know what the final rules could look like. However, the federal government has said they will “honour the spirit of Bill C-208, while safeguarding against any unintended tax avoidance loopholes”.
We will advise further as soon as the rules are clarified. If you have questions in the interim, discuss with your tax advisor what Bill C-208 might mean for you.