Starting January 1, 2024, new tax rules will impact how Canadian business owners transfer their businesses to family members and employees. These changes stem from the 2023 budget, aiming to address longstanding challenges in business succession.
Family Business Transfers
Previously, business owners faced tax disadvantages when transferring their businesses to family members compared to selling them to outsiders. New legislation now ensures that these intergenerational transfers receive fair tax treatment, provided certain conditions are met.
- Immediate Transfers: Must be completed within 36 months.
- Gradual Transfers: Can take place over 5 to 10 years.
Meeting these criteria can exempt the transaction from deemed dividend rules, allowing for a smoother, more tax-efficient transfer of family businesses.
Employee Ownership Trusts (EOTs)
The new rules also introduce Employee Ownership Trusts (EOTs), offering a succession option where businesses can be transferred to employees. Under this framework, employees can collectively own the business through a trust, without the need to purchase shares directly.
Key benefits of EOTs include:
- No 21-year deemed disposition rule
- Extended shareholder loan repayment period (up to 15 years)
- No deemed interest benefit for shareholder loans
- Extended capital gains reserve (up to 10 years)
These changes are designed to make employee buyouts more feasible and provide business owners with an alternative to selling to external buyers.
Conclusion
These new rules represent a significant shift in how business transfers are taxed in Canada, benefiting both family business owners and employees. If you’re considering a business transfer in 2024 or later, understanding these new regulations is crucial for effective planning.
