New Federal Legislation Provides Same Tax Treatment As Arms-Length Parties
Michael Espinoza is the Senior Manager, National Tax for Grant Thornton LLP
BRITISH COLUMBIA – Family members wanting to sell their companies to other family members will now find it less expensive to do so, with the passing of Federal Bill C-208.
The bill was granted Royal Assent on June 29 after passing through the Senate and House of Commons, and the legislation now provides the same tax treatment to the transfer of a family business as the sale of a business between arm’s length parties.
“When the owner of a business wanted to sell the business or retire prior to Bill C-208, their best alternative from a tax perspective was to sell to an arm’s length party, rather than to pass down their business to their child (who was often already active in the business),” states Michael Espinoza, Senior Manager, National Tax for Grant Thornton LLP. “It would cost the business owner significantly more in taxes to sell to his or her child.”
Espinoza gave an example.
“Transitioning a business in BC that is worth $850,000 to an arm’s length purchaser could be undertaken tax free in many circumstances by utilizing the life-time capital gains exemption,” he notes. “That same sale to a child would have cost the owner $415,000 in taxes before Bill C-208. This is because any sale of the owner’s shares to a corporation that is owned by the child would result in the capital gain being taxed as a deemed dividend, prior to Bill C-208.
“The changes in Bill C-208, which apply to qualified small business corporation (QSBC) shares and qualified farm or fishing corporations, puts these transactions on even footing from a tax perspective. This means that the business owner’s decision is not driven by the potential negative tax consequences of a non-arm’s length transfer or sale.”
Bill C-208 provides the same tax treatment to the transfer of a family business as the sale of a business between arm’s length parties now, and the tax savings can be significant.
“Firstly, the BC combined federal-provincial tax rate on capital gains is approximately 22 per cent lower than the rate on non-eligible dividends. On a $1 million capital gain, that means savings of over $220,000,” Espinoza points out. “Secondly, since the sale would be taxed as a capital gain, the business owner may be able to access the capital gain exemption, resulting in the potential to access almost $900,000 tax-free. On that same $1 million, this means an overall tax savings of over $460,000.
Espinoza notes that for many clients the pre-Bill C-208 legislation made it difficult, and often impossible, to transfer their family business to the next generation without incurring a significant amount of tax.
“This often meant that family businesses had to undergo costly alternative tax planning resulting in significant additional costs to effect the intended transfer,” he says. “Bill C-208 addresses this perceived unfairness by providing exceptions to small business owners, farmers and fishers, making it easier and more cost-effective to pass their business to the next generation. Bill C-208 puts business owners on the same playing field now, regardless of whether they sell to their children or an arm’s length party.”
Espinoza says that overall, Bill C-208 is a positive change to facilitate the intergenerational transfer of a family business in a tax-effective manner.
“The changes in this bill will benefit business owners however, they still need to be prudent in implementing family transition planning,” he points out. “The rules on intergenerational transfers introduced in Bill C-208 can be confusing and somewhat unclear, so business owners are cautioned to consult with their accountant and lawyer well in advance of undergoing any planning to take advantage of these changes.”
