Changes may be coming as early as November 1st to the new intergenerational transfer rules introduced in private members Bill C-208. During this video, we're going to introduce you to three considerations that you may want to take a look at now.
These include:
- Does this apply to my family business?
- What are the expected changes?
- And given these expected changes, should we do anything before November 1st?
Before we get to these three considerations, let's re-review what Bill C-208 is.
Bill C-208 is a private member's bill designed to facilitate the intergenerational transfer of a business. It includes changes to section 84.1 of the Income Tax Act that will allow a business owner to sell their shares in a qualified small business, family farm or fishing corporation to a corporation owned by the taxpayers child or grandchild without the adverse tax consequences that previously applied; providing access to both the capital gain rates and the capital gains exemption on intergenerational transfers, leveling the playing field with third party sales.
Now that we've defined Bill C-208, let's take a look at the three things you should consider now. First, does this apply to me? Does my business qualify?
Corporations must be considered a qualified small business corporation and have capital below 15 million dollars. So it is not available to passive businesses such as investment companies and most rental properties.
It will have to meet different asset tests, both at the time of the transaction and the prior two years. You will need a third party valuation to support these values.
Secondly, what are the changes that are expected in November?
Finance has made the following comments:
- Requirements to transfer legal or factual control to the child or grandchild.
- Parent's ongoing ownership percentage would be limited.
- The parent will have to transition out of the business and the child transition into the business.
In essence, they want to mirror a third party sale. But family business transfers are different.
Quebec, which already has enacted similar legislation, has added criteria, most notably disallowing trusts and preventing access where parents or grandparents have previously frozen off to the next generation, but have not been active in the last 24 months.
Finally, with these points in mind, should I do anything before November the 1st?
And in many circumstances, the answer is yes. If a previous freeze occurred and it occurred later than 24 months ago, you should consider a sale for notes.
If a trust owns the parent shares, you should consider the same or withdrawing those shares from the trust.
If the transfer is a staged ownership or staged transfer, which is often the case in family businesses, you may consider an earlier transfer of that staged ownership.
And while the new rules will look to prevent compensation planning with the capital gains exemption, this opportunity does exist before these new rules come into place, and you may want to consult with your tax advisor on how to withdraw money from your company.
We at Grant Thornton recognize the importance of intergenerational transfers both to the families we serve and the communities in which we operate. We want to do everything we can in order to help keep that business in the family. We recognize that Bill C-208 is both complex, and has many nuances. Our skilled advisors are here to help you navigate those rules. We believe you deserve the right to keep the business in the family. We want to be able to help you navigate these rules now, before the November 1st changes.
