Canada: Income tax relief for intergenerational transfers of small businesses, family farms

Pending income tax relief for intergenerational transfers of small businesses, family farms

Pending income tax relief for intergenerational transfers of small businesses, family farm

There is pending income tax relief with regard to intergenerational transfers by small business owners and owners of family farm or fishing corporations in Canada.

The new legislation (pending Royal Assent) is intended to address certain intergenerational transfers of shares when parents of a family could incur a significantly higher tax bill than would have been incurred if the shares were sold to an arm's length party. The legislation provides greater flexibility for restructuring family businesses involving siblings. Specifically, these changes include new exceptions to measures affecting the taxation of transfers of qualified small business corporation shares and family farm or fishing corporation shares. These rules are expected to be effective on the date they receive Royal Assent.

Generally, these rules provide that when taxpayers transfer shares of a qualified small business corporation or shares of a family farm or fishing corporation to a corporation controlled by their children or grandchildren who are at least 18 years of age, the transfer will not result in a deemed dividend to the taxpayers when certain conditions are met. When the new exception applies, taxpayers that undertake these transfers may instead be able to realize lower-taxed capital gains and potentially use their lifetime capital gains exemption, which is equivalent to the tax treatment that would apply if they sold the shares to an arm’s length party.

Although these changes are expected to be enacted, the Department of Finance expressed concerns about these measures earlier in 2021. Specifically, Finance’s view is that the legislative relief is too broad, and not sufficiently targeted to the intergenerational transfers that the rules are intended to facilitate. As a result, it is not yet clear whether these rules may be further adjusted by future amendments.

Read a June 2021 report [PDF 217 KB] prepared by the KPMG member firm in Canada


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