Most business owners have heard of the capital gains exemption. It allows farmers and other business owners to sell shares of their corporation, and farmland that has been actively farmed, without paying tax on capital gains of up to $1 million ($913,000 for non-farming businesses). This is a significant tax benefit, but:
- What if you want your business to stay in the family?
- What if you don’t intend on selling your business anytime soon?
- What if this benefit is taken away by a government needing to raise tax dollars?
- How do you realize this tax benefit?
On June 29, 2021, new tax rules (called Bill C-208) were enacted that created new planning opportunities for business owners. Bill C-208 allows parents to sell shares of their corporation to a corporation controlled by one or more of their children with the parents being permitted to claim their capital gains exemptions. Before Bill C-208, the parents would not have been able to use their capital gains exemptions and, in fact, would have been punished by having the transaction taxed at dividend tax rates rather than capital gains tax rates.
For more information about Bill C-208 and how it improves tax fairness for family businesses, you can read my article from October 7, 2021: “Transferring the Farm to the Kids Now has New Tax Rules” (https://www.producer.com/opinion/transferring-the-farm-to-the-kids-now-has-new-tax-rules/).
Under the current Bill C-208 rules, the following requirements must be met to utilize this planning:
- The shares being sold must be Qualified Small Business Corporation Shares or shares of a Family Farm Corporation.
- The purchaser corporation must be controlled by one or more children or grandchildren of the seller of the shares.
- The children/grandchildren must be 18 years old or more.
- The purchaser corporation must not dispose of the purchased shares within 60 months of the purchase.
- The business cannot be “too large” (the benefit is reduced or eliminated if the corporation has “taxable capital” in excess of $10 million).
- The seller must provide the federal government with an independent assessment of the fair market value of the shares purchased.
- The seller must provide the federal government with an affidavit signed by the seller and a third party attesting to the disposal of the shares.
Notably, Bill C-208 does not require your child to take over your business or for you to retire. In fact, the current wording of Bill C-208 does not require your child to have any involvement in the operation of your business (for example, perhaps your child is pursuing post-secondary education or a different career right now). Furthermore, you do not need to sell all of your shares to your child. You can sell as many shares as you want (for example, you can sell just enough shares to use up your capital gains exemption).
Therefore, Bill C-208 creates an opportunity for business owners to use their capital gains exemptions without needing to sell their whole business and without needing to retire. With proper planning, this is a great opportunity for business owners to use their capital gains exemptions.
This all sounds too good to be true – and soon it might be. The federal government thinks that Bill C-208 is too generous. Initially, the federal government suggested that it would change the legislation in November, 2021. While that did not happen, the recent federal budget delivered in April, 2022, announced that the government plans to review this matter and that new legislation could be brought forward in the fall of 2022. The intention of this new legislation will be to limit when Bill C-208 can be used.
Currently, Bill C-208 provides an opportunity for business owners to use their capital gains exemptions in many situations, including where they do not intend to sell their business any time soon or where they are not yet ready to retire. This opportunity might be eliminated or restricted in the future. Therefore, business owners who have not yet used their capital gains exemptions and can meet the requirements listed above should consider taking advantage of the current rules before they are revised.
Michael J. Deobald
STEVENSON HOOD THORNTON BEAUBIER LLP
500 – 123 2nd Avenue South, Saskatoon, SK S7K 7E6
This article is provided for general informational purposes only and does not constitute legal or other professional advice and does not replace independent legal or tax advice.
This article was originally published in The Western Producer on May 26, 2022.