Jared Pilon
Intergenerational Business Transfers
Billions in Canadian farming assets are set to transition in the next decade. Business succession planning should be top of mind for all food and agribusiness owners. If you are planning to transition your farming operation, taking advantage of current legislation under Bill C-208 before the end of 2023 may provide your family with added flexibility.
Pre-Bill C-208 Rules
Prior to Bill C-208 receiving Royal Assent on June 29, 2021, many considered the tax implications associated with the transfer of the farm to the next generation to be unfair. Application of Section 84.1 of the Income Tax Act resulted in the vendor being deemed to have received dividends on the disposition of their shares instead of realizing a capital gain.
The application of this rule resulted in the transferor not being able to use his/her Lifetime Capital Gains Exemption (LCGE). In 2021, the LCGE was $892,218 in respect of the sale of qualified small business shares and $1 million if shares of a qualified farm or fishing corporation were involved.
Changes from Bill C-208
The implementation of this Bill allows a farm operator (and/or their spouse) to sell his/her shares to a corporation controlled by their child or grandchildren (age 18 or older). This would allow for the seller to use their LCGE, thus eliminating or reducing tax on the transfer of the farming operation.
Some conditions must be met to allow for the seller to be able to apply their LCGE:
- The vendor must dispose of Qualified Small Business Shares (QSBC) or Qualified Farm and Fishing Property (QFFP). An independent valuation must be provided to the Canada Revenue Agency as to the fair market value of the property. Lastly, an affidavit must be signed by the vendor and a third-party attesting to the disposal of the property.
- The purchasing corporation must be controlled by one (or more) of the vendor’s children or grandchildren (age 18 or older). The shares acquired by the child/grandchild’s corporation must be retained for a minimum of 60 months from date of purchase, expect in the case of death.
Property that is eligible for application of the LCGE:
- QSBC shares and shares of a QFFP (shares of a Canadian-controlled private corporation that earns active business income).
- Farm property (buildings, land, quota, equipment, etc.) used in the business of farming.
- An interest in a family farm partnership.
Important tip: Among other qualifying rules, at least 90% of the assets of a farm corporation or partnership must be used in the active farming operation to enable the vendor to gain access to the LCGE upon disposition of his/her shares/equity stake.
Amendments to Bill C-208
Immediately upon passing Bill C-208, the Department of Finance indicated that it would be proposing changes to the bill to specifically close loopholes that it thought could be used for purposes other than genuine farm transfers. Budget 2023 included amendments to Bill C-208 that would allow families to access the LCGE if one of two transfer options are used. Transfers are limited to shares of QSBC or QFFP entities. The definition of ‘children’ was expanded to include stepchildren, children-in-law, nieces & nephews and grandnieces and nephews.
The two transfer options available to vendors are: Immediate Business Transfer or Gradual Business Transfer.
| Conditions | Immediate Business Transfer | Gradual Business Transfer |
|---|---|---|
| Control of Business | Immediate & permanent transfer of legal/factual control (inc. majority of voting shares) and the balance of voting shares transferred in 36 months. | Immediate & permanent transfer of legal control (inc. majority of voting shares) and transfer of balance of voting shares in 36 months. |
| Economic Interests | Immediate transfer of common growth shares and balance in 36 months. | Immediate transfer of majority of common growth shares and the balance in 36 months. Additionally, parents must reduce economic interest within 10 years to:
|
| Management | Management of business transfers in a reasonable timeframe. (generally 36 months) | Management of business transfers in a reasonable timeframe. (generally 60 months) |
| Retention of Control | Child(ren) retain legal control for 36 month period following initial share transfer. | Child(ren) retain legal control for 60 month period following initial share transfer. |
| Active Work | At least one child remains active in the business for 36 months following initial share transfer. | At least one child remains active in the business for 60 months following the initial share transfer. |
Conclusion
The above transfer options will be effective for transactions that occur on or after January 1, 2024. If you are considering an intergenerational business transition in the near future, it may be beneficial to complete the transition under the current Bill C-208 rules if it is determined that the amended rules are too restrictive for your family situation.
Reach out to Legacy Accounting LLP at to discuss your intergenerational business transition planning needs today.
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