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The potential savings on wealth transfer taxes with Bill C-208 could amount to as much as $400,000
“Keeping the business in the family” will get a whole lot easier — and a whole lot less costly — when Bill C-208, which received Royal Assent this week, comes into force on January 1, 2022.
“The legislation allows business owners to sell shares of their business to their children when they retire, or split up the business among siblings, without experiencing the financial disadvantages they have under current tax law,” said Dino Infanti, the Vancouver-based national leader, enterprise tax at KPMG.
Previously, the Income Tax Act (ITA) treated the proceeds of intergenerational sales as deemed dividends to the vendor; sales to third parties, however, were treated as lower-taxed capital gains that could also be utilized against lifetime capital gains exemptions.
Bill C-208 — a private members bill sponsored by Manitoba Tory MP Larry Maguire and supported by all parties — amends the Income Tax Act to put family business owners in the same position when they transfer control to their children or grandchildren as if they had sold the business to an unrelated third party. In other words, the proceeds of intergenerational sales are now treated as capital gains that can be utilized against lifetime exemptions.
The benefit derived from using lifetime capital gains exemptions, which now approach $900,000 for dispositions of qualified small business corporation shares and 1 million for qualified shares of farm and fishing corporations, can be huge.
“While results can vary from province to province and to some extend depend on the type of dividend, the potential tax savings at the marginal rate are likely north of $400,000,” Infanti said.
It’s important to remember, however, that Bill C-208 reduces access to the capital gains exemption if the taxable capital involved exceeds $10 million; at $15 million or more, there’s no access at all. Critics say this will unfairly limit capital-intensive family businesses from benefitting from the changes.
Otherwise, intergenerational transfers qualify if the shares transferred are shares of a Qualified Small Business Corporation, a family farm or a fishing corporation; the corporation purchasing the shares is controlled by the parent’s children or grandchildren, who are at least 18 years old; and the purchasing corporation does not dispose of the shares within 60 months of acquiring them for a reason other than death
This being said, the changes have been a long time coming, an issue since the 1980s.
“For private business, the changes remove a major irritant to family succession,” said David Rotfleisch of tax boutique Rotfleisch & Samulovitch P.C. in Toronto. “The CRA or the federal government should have done it years ago, because small business is the main engine driving the Canadian economy.”
And in practical terms, the changes make sense.
“Intergenerational transfers are fairly commonplace because family businesses are built to be passed on to the next generation by way of leaving a legacy,” Infanti said.
But families also have differences. So it’s not uncommon for businesses to be divided among siblings. But achieving that was easier said than done.
“The difficulty — and it was a major problem — was that siblings were exempted from the normal rules,” Rotfleisch said.
The Income Tax Act contains a “butterfly” provision, one that allows business to be split up without incurring tax liability in certain circumstances. The most common version of the “butterfly” is called the “related party exception”, which permits “related parties” to divide a business in a tax-free manner. Somewhat counterintuitively, however, siblings were not considered “related parties” for the purpose of this exception.
“There was no rationale for excluding siblings from butterfly treatment,” Rotfleisch said. “It’s a very important tool when people go their separate ways, something siblings often do when they inherit.”
Bill C-208 remedies the problem by providing that, in certain circumstances, reorganizations involving siblings will qualify for butterfly treatment.
“That will simplify life immensely,” Rotfleisch said.
Both the Canadian Federation of Independent Business (CFIB) and the Canadian Federation of Agriculture (CFA) have welcomed the passage of Bill C-208.
The CFA estimates that $500 billion in farm assets are set to change hands within the next 10 years. For its part, the CFIB projects that 50% of small business owners wish to transfer their operation to a family member, while 75% of small business owners intend to exit their business by 2028.
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Julius Melnitzer is a Toronto-based legal affairs writer, ghostwriter, writing coach and media trainer. Readers can reach him at [email protected] or https://legalwriter.net/contact.