RSW Tax Insights
Intergenerational Business Transfers
In June 2021, Bill C-208 became law to provide an easement for intergenerational business transfers to make sure that these transitions are excluded from the anti-avoidance rule of section 84.1
As a backgrounder, section 84.1 prevents an individual owner of shares of a family business from converting what would otherwise be a taxable dividend into a tax-free return on capital using related party transactions and reliance on the capital gain exemption.
So, Bill C-208 is certainly a welcome good step to ensure family businesses are transitioned into the next generation without complications all the while relying on future cash flows of the business to pay off the retiring shareholder and not excessively borrowing.
Part of the enacted legislation, the transfer is taxed the same as an arm’s length sale; thereby allowing the use of the capital gains exemption.
Also, the individual who transfers the shares must provide the Canada Revenue Agency (CRA) with these documents:
- a valuation report that is an independent assessment of the fair market value of the transferred shares, and,
- an affidavit signed by the individual and a commissioner of oaths or notary public, attesting to the disposal of the shares.
In April 2022, the CRA published what would be the requirements for an independent assessment of the FMV. Understandably, the valuation must be completed by someone who meets these requirements:
- is unrelated to the corporation or vendor and does not have any financial interest in the transactions, and,
- has sufficient knowledge and experience in valuation and the industry being dealt with
The specific contents of the valuation report will depend on the nature of the corporation, its location, and its operations. A valuation report typically includes the following information:
- calculations of value
- analysis of the business, industry, location, and economy to assess risk
- explanation of the calculations and the methodology rationale
- appraisals of real property and other assets if the company’s value is based on assets
- analysis of the rights and restrictions of the corporation shares and other agreements
- description of the assumptions made when completing the analysis
A report that meets the Chartered Business Valuation Institute’s standards will meet the CRA’s expectations. Although the CRA did not specify that a Chartered Business Valuator is required to complete the valuation; what we understand is, a report issued by anyone other than a chartered business valuator is more likely, than unlikely, to be challenged.
Also, it announced that if a valuation report is not provided to the CRA, the rules, as they are announced, are not met and hence the anti avoidance rules are triggered.
On the CRA website, the affidavit and the valuation report must be submitted along with the personal income tax return of the transferor. This strongly suggest that the valuation report be ready before the transfer or in or around the transfer date, if it has been amended.
Also, on the CRA website is an example of an affidavit to assist the transferor in drafting it and having it signed by a notary public or commissioner of oaths.
For more information on intergenerational business transfer contact Hachem Halabi, D.FISC, CPA