November 2015
Let’s Talk
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Transferring a business to a family member:
Quebec has taken a step in the right direction!
Transferring a business to a family member may not always be to the seller’s advantage and,
sometimes, may even be unfair. Quebec’s Finance Department seems to be increasingly
aware of this situation. Although it recently proposed new measures that would apply for
transactions carried out after December 31, 2016, there is still much more to be done.
A question of fairness
Stéphane Lauzon,
CPA, CA, M. Tax
Partner, Tax
Richter
[email protected]
To have a better understanding of the potential disadvantages of transferring a business to
a family member, consider the example of a father who would like to sell his company shares
to his son for $2,000,000. The son would acquire the shares through a holding company,
which would have borrowed the necessary funds in advance. This sale of shares would not
allow the seller to claim a capital gains deduction and would increase the amount of income
tax on the transaction by approximately 15%. In fact, the father would be required to pay
approximately $800,000 in income tax (i.e. 40% of $2,000,000) on the gain. If the same
transaction involved a purchaser dealing at arm’s length with the father, this person would
have had to pay significantly less tax. The first $800,0001 would have been exempt from
tax and the remaining $1,200,000 would have been taxed at approximately 25%. In other
words, the seller would have saved approximately $500,000 in income tax. This question of
fairness has been brought to the attention of governments on numerous occasions over the
past several years and no action had been taken until now.
The capital gains deduction amounts to $813,600 in 2015.
This amount has been indexed annually since January 1, 2015.
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Solutions are on the horizon
Certain recommendations were made regarding the transfer of family businesses as part
of the Commission d’examen sur la fiscalité québécoise. It is important to understand that
this issue not only involves Quebec tax law. The federal government must also amend its
legislation in order for the proposed recommendations to have real significance.
On March 26, 2015, the Quebec Finance Department proposed new measures
that could allow for certain family businesses to be transferred without placing the
seller in an unfavourable position. These proposals were largely predicated on the
recommendations made by the Commission d’examen sur la fiscalité québécoise. They
would allow an individual taxpayer to sell qualifying shares of corporations in the primary
and manufacturing sectors to a non-arm’s length corporation, as part of the transfer of
a qualified family business, and to claim a capital gains deduction. These new measures
would apply to transactions after December 31, 2016.
A partial solution
Although this in itself is good news, nothing has been won by business owners who want
to sell their company to family members. In fact, the criteria to qualify as a transfer of a
qualified family business have not yet been made public. The Finance Department has
stated that they would be made known within the next year. An element of complexity has
been added for the application of these new rules. Taxpayers wishing to avail themselves
of these new measures will be required to obtain a certificate of eligibility, to be issued by a
body that has not yet been identified, prior to the sale of shares. It is also very important to
note that this proposed tax relief would only be available to corporations in the primary and
manufacturing sectors.
The federal government has still not stated its intention to harmonize its provisions with
these new rules. In this context, a transaction that would be beneficial under Quebec tax
law would be unfavourable from a federal standpoint. Moreover, given the administrative
requirements involved in obtaining qualification in Quebec, the new measures are not likely
to provide a real solution to the problems related to the transfer of a business among family
members.
Nonetheless, this is the first real solution that has been proposed and we hope that these
efforts to raise awareness made by the Quebec government will lead to open-mindedness
on the part of the federal government so that a concerted solution may be proposed for all
Canadians.
EVOLUTION OF EXCELLENCE