A win in tax planning for Canadian family businesses

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    “Bill C-208 allows an individual entitled to the full lifetime capital gains exemption to sell shares in a qualifying corporation and not pay regular income tax; However, an alternative minimum tax may apply, ”said Infanti. “Compared to the current rules, the difference in tax impact on the family could be north of $ 400,000, assuming the individual seller is in the top tax bracket.”

    The decisive factor is that the buying company must hold the shares in question for at least 60 months after they have been acquired. If it does sell or sell the purchased shares to a third party within the 60 month window, the CRA will consider it as if the original business owner sold the shares to the third party who purchased them and the new exemption rule applies than never advertised. Of course, Bill C-208 makes an exception for situations where death forces the stock to be sold early.

    The bill also leaves additional exceptional cases and potential pitfalls for family businesses open. An example highlighted in KPMG Canada’s tax update to the bill considers the amalgamation of the buying company owned by the child or grandchild and the company of the original business owner. If this happens before the 60-month window has expired, this could result in the applicable disposition rules in accordance with Section 84.1 being applied.

    During deliberations in the Senate, the Treasury Department also raised concerns that the bill as presented could be too broad and that some transactions masked as intergenerational transfers could pass. Although certain changes could follow at some point in the future, the bill received royal approval on June 29 and is now law.

    “That is very welcome news,” said Infanti. “With the introduction of Bill C-208, entrepreneurs will be able to better understand and plan their retirement without differences in after-tax income affecting their decision to pass the company on to the next generation.”

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