Changes to the Income Tax Act have brought significant shifts in the taxation of small businesses, especially when it comes to intergenerational transfers. The new Bill C208 provides tax relief to small business owners seeking to transfer shares in the business to their family members.
Before the passage of the bill, share transfers from business owners to family members did not qualify for the capital gains tax exemptions and such transactions were taxed at the dividend rate. However, this new legislation allows for intergenerational share transfers to be treated the same as a transfer of shares to an ‘arm’s length’ corporation. Small business owners who transfer their business to children or grandchildren can now enjoy a capital gains exemption of up to $892,218. To claim this exemption, the shares being transferred must have a fair market value, which highlights the need for an accurate business valuation. Bill C208 requires an assessment of the fair market value of the shares be carried out by an independent valuator and reported to the Canada Revenue Agency.
A business valuation will determine the fair market value of your business, ensuring that you do not underestimate or overestimate its worth. A proper valuation will also help ensure that the transferor is not subject to any penalties or fines for underreporting the value of their shares. To determine the value, the valuation process will consider various factors, including the financial performance of the company, assets, liabilities and market conditions.
A Certified Business Valuator (CBV) can provide an independent valuation for this purpose. We advise anyone thinking of transitioning their business to a family member to speak to a qualified tax expert. This along with an independent valuation, which Portage can provide, can help you maximize your capital gains exemption, and ensure the seamless transfer of your business to your family.
Laryssa Rollo CPA, CA, CBV
Senior Manager | Portage M&A Advisory