Bill C208 has introduced new flexibility for Canadian family business owners, especially those in agriculture. One powerful result is the ability to use a parent’s capital gains exemption while they are still alive, while also withdrawing cash from a corporation in a tax-efficient way.
Let’s walk through a simplified example to show how this works in practice.
Prefer to watch the video?
The Scenario
We have a farming child who owns common shares in a farm corporation. Their parents, Mom and Dad, each have $500,000 in unused capital gains exemption room. The goal is to use that exemption now, while moving money out of the corporation efficiently.
Step 1: Estate Freeze and Trust Setup
The farming child begins by converting their common shares into preferred shares. This is called an estate freeze. Then, new common shares are issued to a family trust. The beneficiaries of the trust include Mom, Dad, and the farming child.
Over time, the value of the new common shares grows. Let’s say they appreciate by $1 million.
Step 2: Capital Distribution
The farm corporation distributes that $1 million in share value to the family trust. From there, the trust allocates $500,000 in value to Mom and $500,000 to Dad. Now, both parents directly own shares worth $500,000 each.
Step 3: Creating a New Corporation
The farming child creates a second company called New Farm Corp. This new company is set up to purchase Mom and Dad’s $1 million worth of shares in the original farm corporation.
Thanks to Bill C208, even though the child owns the new company, Mom and Dad can still claim their capital gains exemption on the sale. This means they pay no tax on the $1 million gain because it is fully sheltered by their exemption room.
Step 4: Cash Withdrawal
New Farm Corp now owns $1 million worth of farm shares. The original farm corporation distributes cash to New Farm Corp, which is used to pay Mom and Dad for their shares.
The result is that the family has moved $1 million out of the corporation and into the hands of Mom and Dad with no tax owing on the transaction.
Final Thoughts
This example is simplified. A proper plan would also need to consider attribution rules, alternative minimum tax, professional fees, legal structure, and family dynamics. That is why it is important to work with a qualified accountant or financial planner.
The key takeaway is that Bill C208 has created a unique opportunity for families to use capital gains exemptions during their lifetime while extracting money from their corporations in a tax-efficient manner.
If you need help creating a tax-efficient retirement plan visit our website and make an appointment with with us.
