Dear RCCAQ members:
On February 20, we published an article in Liaison magazine on tax unfairness in connection with sales of businesses to family members. Until recently, tax exemption measures favoured business transfers to third parties.
However, the day after our article appeared, the Quebec Finance Ministry issued an official information bulletin (French only - page 3) confirming that the family business tax exemption granted in 2016 to the primary and manufacturing sectors would be extended to all other sectors as well.
It is important to note that eligibility criteria for obtaining capital gains deductions apply to businesses transferred to family members as well as to non-related persons. In addition, firms that qualify for this tax exemption must meet the definition of a "small business corporation", as set out in the Income Tax Act. In this regard, please note that despite the apparent implication, small and medium-sized enterprises are not the only entities covered by this definition (consult the simplified definition below).
This change applies to business transfers carried out after March 17, 2016. Needless to say, owners interested in taking advantage of this measure should contact their tax specialist for information on their company's eligibility.
Following the federal government's refusal to adopt similar legislation just a few weeks ago, this gain at the provincial level is definitely a step in the right direction for brokerage firms. The RCCAQ will not hesitate to use this source of leverage in its lobbying efforts. Indeed, we will remind the federal government that a tax exemption is important in light of the business succession challenges facing brokerage firms. This battle ties in directly with the RCCAQ's initiatives to ensure the future viability of our sector.
If you have any specific questions concerning your company, you are advised to contact a tax specialist directly. If you have any comments you would like to share with us, please send us an email (communications@rccaq.com).
Kathleen Ann Rake
RCCAQ Chair
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Summary definition of a small business corporation (SBC)
First and foremost, the presence of the word "small" in "small business corporation" could lead to confusion. In actual fact, there are no restrictions concerning business size.
Under the Income Tax Act, a SBC is a private Canadian-controlled company of which all or nearly all (i.e. more than 90%) of the fair market value of its assets:
- Are used primarily in an active business carried on primarily (i.e. more than 50%) in Canada; or
- Consist of shares of another SBC connected to the company; or
- Consist of debt securities (bonds, notes or similar) of another SBC connected to the company; or
- A combination of the above.
When computing the fair market value of assets, it should be noted that gross assets should be considered (not net assets, from which the company's liabilities have already been subtracted). In addition, all assets, including unrecorded assets, such as goodwill, as well as client lists and other intangible assets, must be considered.
For further information on the tax benefits relating to small business corporations, please refer to our tax bulletin "Incorporating Your Business".
BDO Canada LLP
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