We wanted to bring your attention to recent developments regarding intergenerational business transfers and the impact of Bill C-208 on tax-efficient succession planning. These updates have significant implications for the transfer of family businesses from one generation to the next, particularly in terms of tax advantages.
Before the introduction of Bill C-208, section 84.1 of the Income Tax Act created challenges, penalizing the transfer of family businesses to relatives compared to third-party sales. However, the new legislation, effective from June 2021, aimed to rectify this issue by allowing non-arm’s length transactions to be treated as arm’s length transactions for tax purposes.
In summary, Bill C-208 amended section 84.1 to enable taxpayers to receive capital gains tax treatment when selling shares of a qualified small business corporation or shares in the capital stock of a family farming and fishing corporation to a corporation owned by their child or grandchild. This provided a level playing field for intergenerational transfers, aligning the tax treatment with that of third-party sales.
It is important to note that the 2021 legislation was broadly worded, which created opportunities for tax planning among small business owners with adult children. However, recognizing the potential for abuse and to tighten the scope of the rules, amendments to Bill C-208 were introduced in the 2023 Federal Budget. These amendments, effective from January 1, 2024, introduce additional criteria for a more comprehensive transfer of ownership from parent to adult child.
While the amendments are yet to take effect, there remains an opportunity to take advantage of the original form of Bill C-208 for transfers completed by December 31, 2023. However, caution is advised as the Canada Revenue Agency may review and challenge plans to ensure compliance with the Income Tax Act.
Looking ahead, it is essential to consider the implications of the new rules for intergenerational business transfers occurring on or after January 1, 2024. These changes aim to strike a balance between providing tax advantages for family transfers and ensuring the authenticity of such transactions.
This is a very sophisticated area of tax and we strongly recommend any clients undergoing a share sale to a non arms length third party consult with us long before the transaction will close. Our team will provide tailored advice, assist with tax planning, and ensure compliance with the evolving regulations, allowing you to make informed decisions about your intergenerational business transfers.
Linked below are some other resources for further reading:
