Keeping Canadian Businesses in the Family
I am a member of the Canadian Advanced Life Underwriters of Canada (CALU). Our association is proud of the work we have done to help Canadian small businesses.
In Canada, there is no estate tax as a true estate tax. Instead, when a person dies, immediately that person's estate owes income taxes calculated based on sale of all assets of that person valued at the day before their passing. This often triggers capital gains taxes for business owners who own shares of their small business.
Before the summer of 2021, there was an anomaly that stated if a person sells their shares to someone not in the family, the person can then claim a lifetime exemption of a portion of the capital gains. This can mean savings of over $200,000 in income taxes per person. However, if the person 'sells' (through inheritance or transfer) to the business-owners' child or grandchild, there is no exemption. The same shares going to a child or grandchild could trigger a tax bill of up to $400,000! That would mean business-owners sell to outsiders to avoid such a heavy exit tax.
CALU and other professional business associations convinced the Canadian Government that this was an error and unintended consequence of previous tax laws. Happily, as of the summer of 2021, a private members' bill passed. It was not supported by CRA or the Department of Finance. The Members of Parliament thought otherwise.
How many businesses could this affect? As of December 2019, the Canadian economy was made up of 1,200,000 small businesses, 97.9%. That is a lot! Now small business owners can keep their operations in the family. We need that so that the Canadian economy can quickly adapt to a rapidly changing business landscape to help our economy rebound from the tumultuous past few years.
If you are a small business owner, I am happy to answer any questions you may have about exit planning. My previous blog about retirement planning then may be of interest.