When it comes time to sell your business or family farm, the structure of the sale can have a major impact on your taxes. A recent change in Canadian tax law, known as Bill C-208, has opened new doors for family business owners looking to transfer ownership to the next generation. Here’s what you need to know.
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The Problem Before Bill C-208
Under the old rules, if you sold your business or farm to an unrelated third party, you could use your lifetime capital gains exemption. That meant you could shelter up to $971,190 in capital gains for small businesses or up to $1 million for family farms.
However, if you tried to sell to your child’s corporation, different rules applied. Section 84.1 of the Income Tax Act would reclassify that transaction as a dividend instead of a capital gain. This could result in taxes of up to $460,000 on the same transaction that would have been tax-free if sold to a stranger.
How Bill C-208 Fixes the Problem
Bill C-208 levels the playing field. Now, parents who sell their business or farm shares to their child’s corporation can use the capital gains exemption, just like they would with an arms-length buyer.
This change means families are no longer penalized for keeping their business within the family. The transaction can now be treated as a capital gain, rather than a dividend, helping reduce the overall tax burden.
A Quick Example
Let’s say you own a business worth $1 million and you want to sell it. Under the new rules, if your child’s corporation buys the shares, the gain qualifies for the capital gains exemption. Your taxable income can be reduced to zero, avoiding the $460,000 tax bill that would have applied under the old rules.
Final Thoughts
Bill C-208 is a meaningful step forward for Canadian business owners who want to keep their legacy in the family. It removes a long-standing tax disadvantage and creates more options for intergenerational planning. If you are considering selling your business or farm to your children, it is important to work with professionals who understand these changes and can help structure the transaction correctly.
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