New taxation guidelines affecting the switch of household companies to the subsequent technology; All the pieces you thought you knew about generational change is fallacious now – taxes

Owners of family-run small businesses, family businesses and

Fishing companies, especially those that

Intergenerational transfers from these companies should be noted

a significant change in Canadian tax law aimed at

"Match the playing field" between related parties and

Arm length transfers. Bill C-208 (the

"invoice"), an invoice from a private member

the Income Tax Act1 (the1

"plot"), received royal approval in June

02/29/2021.

The bill makes substantial changes to two provisions of the

Act, namely Sections 55 and 84.1. The amended section 55 allows

Siblings to gain access to the related party exception from the capital

Profit deduction provisions in subsection 55 (2) of the Act. Changed

Section 84.1 is considered non-weapons in limited circumstances

Length transaction to be an arm's length transaction. On the

Law comes into force, a shareholder sells shares of qualified

Small business, family business and fishing

Companies can access capital gains treatment whether or not the

Buyer is a company owned or owned by a child or grandchild

independent third party if certain conditions are met.

Background – Section 84.1, Excess Stripping and

Generation change

For the purposes of the following discussion, it is assumed that

All natural and legal persons described are domiciled in

Canada.

In principle, a taxpayer can sell shares in a trading company

the capital assets of the taxpayer are under normal market conditions

Third parties and have the capital gain taxed as capital gain

Tax rates. 2

Section 84.1 of the Act is an anti-circumvention rule. It is

designed to prevent corporate surpluses that would be taxed with

Dividend tax rates3 if this surplus were distributed to

a taxpayer as a dividend, from converting it into a capital gain

taxed at (lower) capital gains tax rates. Section 84.1 applies

when a person sells shares in a Canadian company to

another entity associated with the person.

It has been known for many years to combat prevention

Rule in Section 84.1 creates a real barrier to succession

Family business from one generation to the next. Specifically,

when one parent holds shares in a family business company. sold

the body of your child, what would that of the parents have been?

The capital gain is converted into a dividend and with. taxed

the higher dividend tax rates. When a parent sells them

Shares directly in their child and uses their lifelong capital

Profit deduction4 to secure the profit from the tax, and the

The child later sells the shares to an affiliate, the child

would experience the same dividend tax treatment to the extent that the

protected profit of parents. Thus, the rule effectively punishes

Families in which a child is a corporation to finance the

to act effectively. And that is also the case when the

Kind pays the full market value for the shares. That contrasts

with the tax treatment the parent would receive in the event of a sale

the same shares to an independent third party. Indeed

Section 84.1 makes it more tax efficient for parents who

Business to others and not to their children.

The Treasury Department has long recognized the problem

requires a solution. But the difficulty was always finding

a balance between the relief of "real"

Generation transfers and inappropriate tax avoidance. The

The Ministry of Finance has consultations with the

Corporate and tax advisory community to find options for

to solve this balancing of interests. Have these discussions

Attempts involved to define and describe the "trademarks"

real intergenerational transfers. You also thought about it

possible solutions that follow the "Quebec Approach" or

the "US approach" to the same issues.5

Background – Section 55, Capital Gains Deduction and Related

Party transactions

Section 55 of the Act is another anti-circumvention rule. It is

designed to prevent paying excessive dividends since

tax-free group dividends from one company to another

Group. This can lead to the transformation of what would otherwise be

a taxable capital gain from the sale of the payer's shares

Convert corporation into a tax-free group dividend. Subsection

55 (2) can serve to convert an excessive tax-exempt group company

Dividend into a taxable capital gain in the hands of the company

Recipient of dividends. It is a legally binding provision. It applies when you

the purposes of (or, in the case of an accepted dividend, arising from

a redemption of units of any of the results of the) payment or

The receipt of the dividend is intended to significantly reduce the

Part of the capital gain that would have been without the dividend

in the event of a sale at the market value of any stake in realized

the paying body immediately before the dividend. It will also

apply if this results in a significant reduction in

Market value of a share or a significant increase in the

Cost of all real estate of the dividend recipient. The commission

does not apply to any part of a dividend that is paid out

the "secure income" of the paying entity with the

Date of dividend.

Without prejudice to the specific nonsense, Section 55 (2) is

is intended to appeal, it has wide application. It can apply to many

Recovery transactions aimed at reaching the family

Purposes of corporate succession and which are not tax avoidance

Schemes.

There are specific carve-outs when re-characterizing in

Paragraph 55 Paragraph 2. The first exception applies to reorganizations

from affiliated companies. The second applies to all businesses

Restructuring when the very specific conditions of exception

Be hit. The first exception is generally available to make it easier

the reorganization of family business structures. But tax policy

assumes that siblings are separate and independent economic

Interests. To prevent what is perceived as inappropriate,

Application of the exception for related persons, brothers and sisters are z

the purposes of section 55, which are deemed to have been negotiated with one another

Arm length and must not be related to each other. This can be a

significant restrictions in the reorganization of family businesses (such as

for example, where siblings want to separate their interests

in a family business in separate corporations). And it can

sometimes lead to illogical results. For example for divisive

Restructuring with parents and children can be the children

Meet the Connected Person requirement because they are related

by parents. But when that parent dies, the bond is lost

and what else would be an acceptable rearrangement between

Siblings are no longer acceptable.

Invoice C-208

The bill amends both Section 55 and Section 84.1. Key to both

Changes is that they only apply in situations where a

"Qualified Share in Small Business" 6

or a "share in the capital stock of a family business or fishery"

Company. "7

The specific changes to the law when the bill is passed

C-208 are as follows:

  • Subparagraph 55 (5) (e) (i) of the Act (which was issued before

    Change, adopted siblings to deal with each other under arms

    Length and not related) is changed to be

    no longer applies to siblings who received the dividend in question

    as part of a transaction or event or series of

    Transactions or events of a corporation in which

    the share capital is a qualified small business owner share

    or a share in the capital stock of a family business or fishery

    Corporation within the meaning of Paragraph 110.6 Paragraph 1
  • Subsection 84.1 (2) is amended by adding a new paragraph (e).

    Now when shares are sold by a parent company to a buyer

    Corporation, the parent company and the buyer company are deemed to be

    Transactions on customary market conditions and are therefore not subject to

    Anti-circumvention rule in Section 84.1 if the following additional

    Conditions are met:
    • the stocks in question are qualified small businesses

      Shares or a share of the share capital of a family business or fishery

      Group;
    • the buying company is controlled by one or more

      Children or grandchildren of parents who are 18 years old

      Age or older; and
    • the buying company does not have the

      are subject to shares within 60 months of their purchase
  • A new provision which is subsection 84.1 (2.3) is added. These

    Subsection has three components:
    • First, it creates rules for dealing with situations in which

      unlike death, the buying company acquires

      actually within 60 months of the

      Purchase;
    • Second, it reduces parents' access to their lifelong capital

      Deduction of profits if the taxable capital of the corporation is used

      in Canada exceeds $ 10 million and completely eliminates that

      Parental access to the deduction when society

      Taxable capital employed in Canada exceeds $ 15 million. These

      Restriction limits the relief at very high

      capital-intensive small businesses;
    • Third, it makes a very unusual and unique requirement that

      The taxpayer concerned must inform the Minister (through them

      Agent, Canada Revenue Agency) with an independent rating from

      the fair market value of the relevant shares and a

      affidavit signed by the taxpayer and a third party

      the sale of the shares.

Analysis and implications

Bill C-208 deals with what has long been known as the

Injustices in the law related to intergenerational transfers

from small businesses, family businesses and family businesses

Fishing groups. The changes in Section 84.1 are designed in this way

to overcome the perceived injustice caused by a seller of the stocks

such transactions to customary third parties receive more

more favorable tax treatment than if she were to sell them

Shares in the next generation of the family. The changes in the

55 Expansion of the scope of reorganization transactions with related companies and persons to

such restructuring is tax-effective as part of a

extended family unit. In this respect, the adoption is this

Legislation should be seen as good news by the owners of the data subjects

Companies.

However, it will soon be seen that it is significant

technical complexity and shortcomings in the new provisions that

may very well require corrections through further legislative measures

Changes. One can only speculate about whether and when there might be

such an answer and whether it could have retroactive effect.

For this reason, taxpayers and advisors should proceed with caution

propose or complete the new transactions with confidence

Regulations in the form in which they were issued. Until there is more clarity

available, be it in the form of legislative changes, technical

Interpretations or judicial decisions can occur to taxpayers

into an area of ​​uncertain tax treatment and outcomes.

A number of concerns about the new regulations have already been raised

raised. These include the following, although further studies of the

Provisions can lead to others:

  • Treasury officials have long approached the potential

    Changes to these sections of the Act with concern to

    Balancing and differentiating between legitimate generations

    Wire transfers and inappropriate tax avoidance. Because these regulations

    did not come from the Treasury, but were in the

    Form of a private membership bill, which appears a careful consideration

    has not been fully addressed, raising concerns that

    "Loopholes" will now exist to enable wealthy Canadians to

    Wrongly avoiding taxes;
  • The "hallmarks" of the legitimate intergenerational

    Transfers are absent from these regulations. In particular there is

    nothing that requires the parent company to cease control of the company,

    nor to require that the child have any stake in the business.

    In addition, it is possible that the parent company sells the shares to

    your child's holding company could then buy

    the child's shares in this holding company resulting from the

    Child without interest in business;
  • There is a requirement that the buying company does not sell

    the relevant shares within 60 months of their purchase. There is no

    Condition that the shares of the acquiring company are owned by

    the children or grandchildren will not be sold during the 60-month holding period

    Period;
  • There will be significant problems with CRA's ability to

    monitor and enforce the provisions of new Paragraph 84.1 (2.3) (a) if

    Stocks are sold within 60 months of their purchase if the current one

    the normal 3-year revaluation period remains in place;
  • It seems that the ban on disposing of the

    are subject to shares of the buying company during the following 60

    One month period applies to the child (or grandchild)

    Buying company also vis-à-vis an otherwise lawful

    internal reorganization;
  • The new rules only allow the transfer between generations

    "Children and Grandchildren". The expanded definition of

    "Child" in subsection 252 (1) includes a child of the

    Spouse or domestic partner of the taxpayer (i.e. stepchildren)

    and the spouse or partner of a child of the taxpayer

    (i.e. sons-in-law, daughters-in-law). It remains to be seen whether

    that's too broad or too restrictive. For example not

    include the taxpayer's niece or nephew who may be interested

    Purchase of the family business;
  • The constraint that the buying company must be

    controlled by one or more children or grandchildren of the taxpayer

    who are 18 years or older means the buyer

    Business cannot benefit from a trust. to be controlled

    these children or grandchildren;
  • The new paragraph 84.1 (2) (e) applies if the shares

    are transferred qualifying shares of small businesses or

    Shares in the share capital of a family business or fishing company

    within the meaning of Paragraph 110.6 Paragraph 1 Such shares are also

    Shares in which the holders can typically use their term

    Capital gain deduction

    ("LCGD") 8. The intention

    appears to be that the LCGD can be used in relation to a sale

    this would otherwise be subject to Section 84.1. But because of

    new subsection 84.1 (2.3), access to the LCGD is reduced by

    Companies with taxable capital greater than $ 10 million and is

    completely eliminated when taxable capital exceeds $ 15 million. To the

    Shareholders of corporations with taxable capital greater than

    $ 15 million even though the LCGD would not be available

    selling shareholder is structuring a

    Selling shares to a child-controlled corporation or

    Grandchildren so that Paragraph 84.1 (2) (e) applies and a capital

    Profit arises rather than an accepted dividend;
  • There are concerns that the formula in the new version

    Paragraph 84.1 (2.3) (b) does not achieve the intended purpose of

    Decrease in the parent's available LCGD on a linear basis

    for the tax years in which the taxable capital in employed

    Canada of the company (or an affiliated group of companies)

    is more than $ 10 million;
  • The new rules limit the amount of

    available parent LCGD that can be claimed under subsection

    110.6 (2) – in relation to qualified agricultural or fishing property and

    Subsection 110.6 (2.1) – in relation to qualified small businesses

    Company shares. You have no influence on the additional, or

    "Charge", deduction possible under sub-item

    110.6 (2.2). This increase applies to sales of

    qualified farm or fishery ownership and increases the total

    Deduction available for such properties at $ 1 million

    (from $ 892,218, indexed through 2021, otherwise available). Although

    This creates an anomaly that is no longer relevant for years

    after the indexing of the limit in accordance with paragraphs 110.6 paragraph 2 and

    (2.1) increases this limit above $ 1 million; and
  • In cases in which the new regulations in Section 55 apply because the

    Subject shares are qualifying shares of small businesses or a

    Shares in the share capital of a family business or fishery

    Corporation, it is now possible to have siblings that actually

    separate economic interests, can participate in capital gains streaks

    with impunity.

Bill C-208 is unique in that it was created privately

Member law, which seldom successfully become law in

Canada. Nevertheless, the draft law was passed by the House of Commons

with the support of all major political parties, but without

government support. Interestingly, it seems that the

Bill went through the Agriculture and Agriculture and Food Committee and

not through the finance committee. It also appears that officials

of the Treasury raised a number of concerns about the

Bill and didn't support it. That is not insignificant politically

Machinations; it may well mean the government and the

In particular, the Treasury Department can try his

Prerogative to propose future income tax laws

proposed measures to revise, amend or limit the provisions

the bill. It remains to be hoped, however, that future changes will be amendment

maintain the desired and beneficial purposes of Bill C-208; and

focus on making the tax rules concerned clearer and more workable,

fair and balanced.

Footnotes

1 Income Tax Act, R.S.C. 1985, approx

(5th Supp.), In the currently valid version (hereinafter referred to as

"plot"). Unless otherwise stated,

Legal references in this article are references to the

Plot.

2 For 2021, an Ontario resident whose income does not include

the profit exceeds $ 220,001, tax on capital gains at one

effective rate of 26.76%.

3 In 2021 for an upper-peripheral Ontario resident

Tax bracket 39.34% for eligible dividends and 47.74% for

non-creditable dividends

4 Currently $ 892,218 (2021).

5 Both the Quebecers and the US federal government have

enacted regimes that create a framework in which intergenerational

Transfers can be made tax-deductible, subject to special conditions

Criteria met. One of the common features of both regimes is

that the parent company / seller cannot be actively involved after the sale

the acquirer or the transferring company.

Hence, both regimes require actual and immediate transfer of

legal control.

6 As this term is used in subsection 110.6 paragraph 1 of

Plot.

7 For the purposes of Section 110.6 (1) (b) of

Plot.

8 When all other conditions are met.

The content of this article is intended to be general

Instructions on the subject. Expert advice should be sought

about your particular circumstances.

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