TAX UPFRONT

Family Business Transfers

Will Bill C-208 smooth out succession planning?

Frequently, founders of a family business want that business to remain in the family once they have moved on. This makes family-sense in terms of a wealth transfer, and it also makes business-sense as those who have grown up and supported the enterprise usually have the intimate knowledge and have developed skills to best realize upon and continue its success.

Unfortunately, under prevailing tax rules, parents as founders have a dilemma: keep it in the family but leave valuable tax benefits on the table, or transfer to outsiders to achieve the optimal tax result.

With royal assent of Bill C-208 this past June, the new tax law may have opened for more tax-efficient family business transfers. Whether and when this may indeed come to fruition depends on the next steps in the law ’ s implementation process, discussed further below. Let’ s look at the problems, and how the new law seeks to address them. dividend, but with some manoeuvring could be converted into a capital gain. For reference, the average combined federalprovincial individual top bracket is 26% for capital gains, compared to 37% and 46% for Canadian eligible and non-eligible dividends, respectively.

ITA Section 84.1 prevents this conversion when someone sells shares of their corporation to another corporation related to that person. This means that the sale of shares by a parent to a child’ s corporation is treated as a dividend. Had the parent instead sold to an arm ’ s length purchaser, the preferable capital gains rate would have applied, and the parent could make use of the lifetime capital gains exemption, which in 2021 stands at $892,218 or $1 million for a qualified farming or fishing corporation.

Bill C-208 amends Section 84.1 to deem the purchaser corporation to be arm ’ s length if it is controlled by a child or grandchild, so long as the shares are held for at least 60 months.

Problem 2 — Dealings among Siblings

ITA Section 55 deals with “butterfly ” reorganizations where a corporation ’ s assets are divided among shareholders ’ holding companies. Subsequent actions may allow certain transfers to be treated as tax-free intercorporate dividends, but an anti-avoidance rule deems these to be taxable capital gains for unrelated parties. The definition of unrelated parties includes siblings.

This causes uncertainty for parents in dividing a business among their children ’ s respective corporations, the children being siblings of one another. They are related through a parent while the parent is living, but the above rule will treat them as unrelated if the parent is deceased. Illogically, the tax efficiency of a future reorganization hinges on a parent’ s longevity.

Bill C-208 amends Section 55 so that it no longer applies to siblings where the transaction involves shares of a qualified small business corporation, or family farm or fishing corporation.

OVER-REACHING ANTI-AVOIDANCE RULES

Sometimes, anti-avoidance rules in the Income Tax Act (ITA) cast a net that extends beyond their intended targets.

In the present case, the concern is with a couple of provisions designed to prevent abusive corporate manoeuvres, but may suppress legitimate planning that would otherwise help sustain family businesses. To the point, owners of incorporated Canadian businesses face serious impediments when selling their shares to a corporation controlled by other family members.

Problem 1 — Intergenerational Share Transfers

A corporate surplus amount received by a shareholder is commonly treated as a

TEMPERING EXPECTATIONS

The Bill received royal assent on June 29, 2021, and a day later the Department of Finance issued a news release stating that the

“ government is committed to facilitating genuine intergenerational share transfers, while preventing tax avoidance that undermines the equity of Canada ’ s tax system. The government proposes to introduce legislation to clarify that these amendments would apply at the beginning of the next taxation year, starting on January 1, 2022. ”

For consideration, Bill C-208 was passed into law with support from members of all parties, but notably was opposed by cabinet. As well, as a private member ’ s bill, it was not drafted by the Department of Finance. The text is brief and may be open to abuse, as intimated by the need“to clarify, ” according to the news release. All this taken together, expect that forthcoming amendments may significantly amend the current text.

For advisors, this is a prime opportunity to engage with small business owners. Succession can be a sensitive conversation to raise with founders; it can also be a difficult one for them to bring up with their families. Regardless what form the law ultimately takes, the spotlight has been cast on the issue by the legal wrangling, so make use of it to open up the succession dialogue.

DOUG CARROLL, JD, LLM (Tax), CFP, TEP, is a tax & estate specialist with Aviso Wealth. He can be reached at doug@douglascarroll.ca.