On June 29, 2021, Bill C-208 amended the Income Tax Act (ITA). This amendment allows families to transfer shares of their small business, family farm, and/or fishing corporation to their children or grandchildren and be treated equally to those who were passing on their businesses to an unrelated (arm’s length) corporation. These new rules allow the “selling party” to pass on the company shares and absorb capital gains by using the Lifetime Capital Gains Exemption (LCGE).
What changed with Bill C-208?
|Before Bill C-208||After Bill C-208|
|Section 55||Siblings were not allowed to convert taxable capital gains into a tax-free intercorporate dividend.||Siblings are now allowed to convert taxable capital gains into a tax-free intercorporate dividend.|
Parents selling business shares to an arm’s length (unrelated) corporation were able to use the Lifetime Capital Gains Exemption to reduce their income tax on the resulting capital gains on the transaction
Parents selling shares to a non-arm’s length (related) corporation, such as a child’s corporation, would have to receive dividends, be taxed at a higher rate, and would not be able to absorb this higher rate through the LCGE.
|Parents selling shares to a non-arm’s length (related) corporation can use the Lifetime Capital Gains Exemption to reduce their income tax on the resulting capital gains on the transaction as long as they meet certain criteria.
Does this apply to my business?
- Are you a small business corporation with less than $15 million in capital?
- Are you an active business?
- Do you meet asset tests both at the time of the transaction and 2 years prior?
- Is the purchaser corporation controlled by one or more children or grandchildren aged 18 or older?
- Does the purchasing corporation plan on not disposing of the purchased shares within 60 months of the purchase?
- Will you have a 3rd party valuation ready to provide to CRA?
- Will both parties be willing to sign an affidavit attesting to the disposal of the shares?
If you answer yes to these questions, you may be eligible for the Lifetime Capital Gains Exemption when you sell your business to a non-arm’s length corporation. Note that this list is not exhaustive, and you may need to meet other requirements in order to qualify.
As these transactions are very complicated with many alternative options depending on your unique business, we strongly recommend that you speak to your tax professional.
Will there be changes to the Bill?
In the July 19, 2021, press release, the Department of Finance clarified that they would look to amend the bill to make sure it facilitates genuine intergenerational transfers and is not used for artificial tax planning or “surplus stripping” purposes. Finance indicated that amendments would address the following issues:
- 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
Finance will bring forward amendments for consultation. Once completed, the amendments will apply as of the date of the publication of the final draft legislation.
Could these changes affect the sale of my business retroactively?
No. The July 19, 2021, press release made it clear that amendments are intended to be made to Bill C-208 to ensure that tax avoidance measures will be put into place. These amendments would require another bill to pass them and would only POSSIBLY be applied retroactively to the date of the final publication draft legislation. To date no legislation has been introduced through parliament.
If you are in a position where you are looking to pass on your business, you should speak to your professional tax adviser and see if this is the right time to sell your business.