Government Eases Restrictions on Businesses Transfers to Children / Grandchildren
Prior to Bill C-208, when there was an intergenerational sale to a child or a grandchild of the shares of a corporation that otherwise qualified for the capital gains exemption, the family was left to make a choice. The family could structure the sale of a corporation so that one of the following objectives were achieved but not both:
- The parents could claim the capital gains exemption, allowing for up to approximately $892,000 of the gain (per parent) to be sheltered from tax
- The child/grandchild could fund the purchase through using a purchasing company. The advantage of using a purchasing company is it allows the loan to be repaid with funds that have not yet been subject to personal tax, allowing for more funds to go towards paying down the loan.
On June 29, 2021, Bill C-208 became law which allows for both objectives to be met subject to certain restrictions. The primary restrictions to utilize these new preferential rules are:
- One or more children or grandchildren of the taxpayer who are all 18 years of age or older must control the purchasing company and the purchasing company must not sell the shares within 5 years of the transaction.
- The business must be under a certain size (benefit is reduced once the taxable capital of a corporation exceeds $10 million and fully eliminated when taxable capital reaches $15 million).
The Department of Finance has indicated in a July 19, 2021 release that they will have more specific rules put in place as early as November 1, 2021 to eliminate artificial tax planning and likely put additional restriction on genuine intergenerational transactions taking place thereafter.
If you are considering a business transfer from a parent/grandparent to a child/grandchild, please reach out to your Roth Mosey advisor as soon as possible to see how these new rules, that will likely become subject to further restrictions on November 1st, may benefit you.