According to reports published by CIBC it is expected that 30% or close to 310,000 Canadian business owners will sell or transfer ownership of their businesses in the next five years. The growing number of transfers has a significant impact on the Canadian economy and predecessor owners.
The lack of effective tax planning and knowledge has resulted in predecessor owners paying significant income tax. This directly affects retirement savings and future well-being.
Transferring Among Family members
Business owners might have family succession allowing them to transfer their family business to the next generation. This allows business to be kept in the family and continue to operate much like they did in the years before. However, section 84.1 of the Income Tax Act (ITA) creates a significant economic loss for the business owner if they decide to keep the business within the family.
The transfer of a business to a family member is administered through section 84 .1 of the ITA, which is in place to prevent tax evasion. In most cases this section of the ITA deprives the predecessor owner of the capital gains exemption, which can save thousands in taxes. This would make selling the business to a third party much more attractive because you can realize the capital gains exemption. Resulting in lower income tax for the business owner.
Section 84.1 has overly complicated the succession planning process. It hinders the business owners if they decide to keep the business in the family.
Like many other, The Canadian Chamber of Commerce has proposed that the federal government modify the ITA section 84.1 to “to facilitate business transfers to family members and make this type of transfer at least as advantageous as transfers involving unrelated third parties through the following measures”.