In Canada, the transfer of a business upon the death of an owner can have significant tax implications. Here are some key points to consider:
- Capital Gains Tax: When a business is transferred as part of an estate, any capital gains accrued on the business may be subject to capital gains tax. This tax is calculated based on the increase in the value of the business since its acquisition. There are some exemptions and deferral options available, but it's essential to understand the potential tax liability that your estate is exposed to.
- Lifetime Capital Gains Exemption: Canada offers a Lifetime Capital Gains Exemption (LCGE) that allows individuals to shelter a portion of the capital gains from tax. As of 2023, the LCGE was $971,190 for Qualified Small Business Corporation shares and $1,000,000 for Qualified Farm or Fishing Property. This exemption can help reduce the tax burden on the estate.
- Succession Planning: Effective succession planning can help minimize the tax impact on a business transfer. Strategies like estate freezes, family trusts, or selling the business to a family member at fair market value can be considered to manage the tax implications.
- Probate Fees: Depending on the province, probate fees may be applicable when transferring assets through a will. These fees can add to the overall cost of transferring a business. Probate planning should never be completed in a ‘silo’ as this can have significant negative outcomes on your final tax liability.
- Professional Advice: Given the complexity of tax laws and the unique nature of each business, seeking professional advice from accountants, tax specialists, and estate planners is highly advisable. They can help navigate the tax implications and develop a strategy that aligns with your goals.
Lifetime Capital Gain Exemption (LCGE)
It is important for your corporation to ‘stay onside’ with CRA’s rules pertaining to Small Business Corporation Shares or Qualified Farm & Fishing Property to make use of the LCGE. Criteria to be met:
- During the 24-month period prior to the disposition, more than 50% of the fair market value of the property owned by the corporation was used in the active operation of the business/farm.
- At the time of disposition, all or substantially all (usually defined as at least 90%) of the fair market value of property owned by the corporation was used in the active operation of the business/farm.
Farm & fishing property enjoys special treatment under the tax act allowing the owner of qualified property to transfer the same to the next generation via a tax-deferred rollover if additional conditions are met. These conditions are:
- Prior to the transfer, the property was used in a farming operation carried on by you in Canada.
- Your children are resident to Canada immediately prior to the transfer.
- The property is principally used in a farming business in which you, your spouse, any of your children or your parents are actively engaged on a regular and continuous basis.
Unlike transfers to a spouse which have to be at either your adjusted cost base (ACB) or at fair market value, certain qualified farm property can be transferred to your child(ren) at a value between ACB and FMV.
It's important to note that tax laws can change over time, so it's essential to consult with professionals who are up to date with the latest regulations and can provide tailored guidance based on your specific situation. Refer to our recent article 'Intergenerational Business Transfers' regarding Bill C-208 amendments and how they might impact your succession plans.
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Although we make strong efforts to make sure my information is accurate, we cannot always guarantee that the information on this website, blog or podcast is always correct, complete or up-to-date.Posted: 10/18/23