Many farmers, fishers, and small business owners have spent their whole life building up their company and want to make sure that when they’re ready for retirement, their farm or business will be transferred to trustworthy and capable hands.
Those hands often belong to family members, so it’s important to make sure that every option has been thought about and discussed to get the most benefit from the transfer of a business.
There are a few options to explore when you’re thinking about the transfer of business ownership, and even more things to take into consideration when preparing for the change. Are you going to sell your business at a lower rate because it’s being sold to one of your children? If so, will you still have a steady income to enjoy in your retirement?
It’s a good idea to talk to an estate planner about your desires and have their assistance when putting your plans in place for the future of your business and your family. You, as well as your family, need to be prepared.
Giving a Business as a Gift
One option for a succession plan is to give your farm or your business to your family members as a gift. This can be either by selling the company for a nominal amount, or even gifting it completely without charge.
Handing over shares of your company or charging a lower rate in the sale agreement than you usually would during the transition is also considered a gift to your successor.
Your children will pay nothing in tax, but the gift will be considered a disposition and so you may have to pay capital gains taxes.
This could be a good option for your family business if it has accumulated a lot of debt or taxes, and you would rather enjoy your retirement while a willing family member takes over control.
Something to bear in mind when approaching a gift or the sale of a farm or business for a nominal value is that the CRA will assess the overall market value of your business after your low-rate sale. This may impact the capital gains tax for the family members you receive the business.
Another option to consider in business succession planning is an estate freeze. An estate freeze essentially freezes the capital gain on your business in order for you to transfer the future capital gains to your family or other beneficiaries.
Implementing an estate freeze means that you will avoid any income tax on the transfer of the business or farm and will allow you to retain control of your business after the transfer and have a steady stream of income throughout your retirement.
An estate freeze is started by setting up a Family Trust that states that the shares of your business are going to be held by the trust on behalf of your family members. You can then cancel your old shares in favour of your new preferred shares, where you will pay dividends to ensure your steady income.
Once you’ve set up your Family Trust, you can then issue common shares to the trust to allow the business value to grow within the trust.
An Estate Freeze and a Family Trust can be included as part of an overall estate plan that you discuss with an expert.
On June 29, 2021 Bill C-208 was given royal assent and became law in Canada. The purpose of the bill is to make it easier for farm and small business owners to transfer their business to their family members when they are ready.
Before the Bill C-208, the Income Tax Act (ITA) succeeding a business to a family member was more complicated and detrimental than selling it to a third party. Now, business owners are afforded the same tax rate when selling to their children as they are when selling to a third party.
The ITA is now more of a level playing field when it comes to business or farm succession. However, amendments are expected and have been promised by the Department of Finance, which means business and farm owners should pay close attention to new information that may affect their business succession plans.
Legal advice will always be needed when it comes to making business succession plans of any kind, and working with an estate planner will allow you to make the best and most fitting plans for your family, and the future of your business.
For more information on preparing your estate for the next family generation, read our other blog articles.
If you would like to learn more about business succession or any other estate planning options. We encourage you to register for one of our upcoming complimentary webinars here.