This article is sponsored by GGFL.
By now, most business owners are likely aware of the positive developments from Finance Canada (Bill C-208) over the summer that have effectively allowed business owners to sell their businesses to adult children and claim the lifetime capital gains exemption, currently just over $900,000 per individual. This was a very welcome move from the government and potentially allows for significant tax savings for a business owner, which was previously not available.
Amidst all of the excitement of the significant tax savings, business owners can be forgiven for not reading the small print of the new legislation. Included as part of the legislation for this type of planning was the requirement to have an independent assessment of value for the private company shares in question, in addition to an affidavit signed by the taxpayer and a third party relating to a sale. If these seem like unusual requirements, you would be correct, it is unusual for Finance to add these requirements directly to the legislation. What this likely tells us is, although this type of planning is now available for business owners, Finance and CRA will be monitoring these transactions and they want to be certain that the planning is not exploited. For example, CRA will be watching to ensure shares are transferred at an amount equal to market value and/or the adult children are actually running the business after the transfer.
It is always recommended when transferring shares (or any asset for that matter) to a related party to get an independent business valuation prepared, given the extremely punitive tax implications that can arise on a CRA audit, if they disagree with the value attached to the transfer. As these requirements are written directly into the new legislation for Bill C-208 and CRA will likely be closely reviewing these transactions this year, it is crucial to get the business/ shares valued by an independent party as part of the transfer. The tax benefit for the business owner is just too significant to risk losing by omitting this step from part of the planning with your advisors.
So now that you know you need a business valuation for the transfer you have done or are planning to do – what’s next? The first step would be to reach out to GGFL’s Chartered Business Valuator team to discuss planning and next steps. It would be best to have the valuation of the shares finalized as part of the planning or shortly thereafter to ensure the value being used for the transfer is correct and to avoid scrambling later in the year to try and get this done.
Kody Wilson is a partner with GGFL Chartered Professional Accountants in Ottawa. He specializes in tax planning for business owners and their families. Kody also leads the business valuation practice at GGFL.