Bill Removes Adverse Transfer Tax Consequences

A private member’s bill which would remove the adverse tax consequences that currently apply when a small business owner sells or transfers their shares in the business to a child or grandchild has been passed into law, says a Grant Thornton ‘Tax Alert.’ Bill C-208 includes changes to Section 84.1 of the Income Tax Act (ITA) on the current ways to pass on a business to the next generation. It is often most desirable for the child to buy the shares of parent’s operating corporation through a holding company. This make it easier for the child to finance the sale with corporate funds, but it is also beneficial for the parent to sell the shares (as opposed to the business assets) to shelter all or a portion of the capital gain on those shares through the capital gains exemption, where applicable. Unfortunately, under existing rules, when the parent sells their shares to a family member what would normally be a capital gain is recharacterized as a dividend. Depending on the province, this can translate into an additional tax burden of over 20 per cent. In addition, the parent can no longer use their capital gains exemption to offset what would have been a capital gain. Bill C-208 attempts to exempt certain intergenerational transfers from the punitive section 84.1 rules. The passing of the bill into law should make it easier and more tax-efficient for business owners to transfer their business to the next generation. At the very least, the changes should make it equivalent to selling the business to an unrelated party.