Bill C-208 and How It Can Affect Your Family Business
Bill C-208 amends the Income Tax Act to reduce taxes that must be paid when a business owner wishes to sell shares of their farm, fishing or small business to their adult children or grandchildren. In the past, the Income Tax Act penalized business purchasers who were not arms-length from the business owner (unrelated).
This bill reduces the tax that needs to be paid when an adult child or grandchild purchases the business from previously as high as 48.27% of the selling price (dividend rate) down to as high as 27.0%, using the capital gains tax rate. Through this change, business owners may be able to use their capital gains exemption to reduce or fully eliminate their total income tax payable.
The bill as it presently reads is open to abuse and so, changes to the bill are coming in November and include, the transfer of the business both legally and factually to the child or grandchild, the amount of time that is allotted for this transition process, the requirements for a parent to transition their involvement to their child or grandchild and identify the level of involvement that the child or grandchild must have after the transfer occurs.
To be eligible for this tax reduction that Bill C-208 permits, there are a few criteria that your family business must meet….
· Your family-owned business must be incorporated to qualify.
· Shares must be sold to the child or grandchild at a fair market value.
· You may be able to use your “Lifetime capital gains exemption”
· Your estate must be frozen. To do that, you must lock in the current value of the company and issue shares to family members who plan to take over the running of the business. By doing this, you will reduce your taxes and any future growth in the company will be taxable in the hands of the new owners.
Planning and transitioning early is crucial if you want to take advantage of this income tax reduction. If you have questions or want to find out if you may be eligible for this tax reduction, please contact our specialists and schedule an appointment at Contact Us | K Liu Accounting Services Inc.