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Business Transfers To Family Members

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family-325218_1920Inadequate Succession Planning

 

According to reports published by CIBC it is expected that 30% or close to 310,000 Canadian business owners will sell or transfer ownership of their businesses in the next five years. The growing number of transfers has a significant impact on the Canadian economy and predecessor owners.

The lack of effective tax planning and knowledge  has resulted in predecessor owners paying significant income tax. This directly affects retirement savings and future well-being.

Transferring Among Family members

Business owners might have family succession allowing them to transfer their family business to the next generation. This allows business to be kept in the family and continue to operate much like they did in the years before. However, section 84.1 of the Income Tax Act (ITA) creates a significant economic loss for the business owner if they decide to keep the business within the family.

The transfer of a business to a family member is administered through section 84 .1 of the ITA, which is in place to prevent tax evasion. In most cases this section of the ITA deprives the predecessor owner of the capital gains exemption, which can save thousands in taxes. This would make selling the business to a third party much more attractive because you can realize the capital gains exemption. Resulting in lower income tax for the business owner.

Section 84.1 has overly complicated the succession planning process. It hinders the business owners if they decide to keep the business in the family.

Recommendation

Like many other, The Canadian Chamber of Commerce has proposed that the federal government modify the ITA section 84.1 to “to facilitate  business transfers to family members and make this type of transfer at least as advantageous as transfers involving  unrelated third parties through the following measures”.

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CRA’s Offshore Tax Informant Program

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The Program

Over the past year the Canada Revenue Agency (CRA) has implemented an ‘Offshore Tax Informant Program’ in hopes of fight international tax evasion. The CRA promises to compensate individuals who help catch tax evaders.

Program Success 

The Financial Post has reported  that this program has generated over 1,000 calls and has led to over 100 active cases. The success of this program banks on the CRA actually putting forth resources to investigate these cases which can take number of years.

Why Now?

Programs like this have been around for number of years,  the Internal Revenue Agency (IRS)  in the United States has had a similar programs since 2006. Other agencies such as the Securities and Exchange Commission (SEC) have similar programs as well. It was just a matter of time before the CRA followed suit.

With falling tax revenues and increasing deficits the governments are scrambling to find a solution. These program have been launched in hopes of  ensuring public confidence in the tax system and to increase tax revenues.

At the beginning of April 2013 the International Consortium of Investigative Journalists (ICIJ) released a report which indicated the issue of world tax evasion and included names of 450 Canadians. In the months following Gail Shea the National Revenue Minister committed $30 Million to find tax evaders. The report by ICIJ help shed the light on how much money was actually being stored offshore. Other governments around the world are also taking note of this problem.

In the Future

However despite having knowledge of the individuals that hold off shore bank accounts the CRA has yet to prosecute anyone. The investigations will be time consuming and complex, it could be years before we see any cases in court.

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How to setup a business in Ontario?

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What type of structure is right for you?

How to setup a business in Ontario?

Setting up a business can be an overwhelming task with a lot to comprehend. It all starts with a dream and a vision, but how do you turn that dream into reality. The dream of becoming your own boss and having the freedom to make your own decisions can be a complicated one at the beginning. Once you have determined on the actual business and its inner workings, you will have to move on to the next step of executing that business. This is where a lot of people get stuck and don’t really know where to go next.

In this article I will explore and shed light on several different business structures available in Ontario. I will also explain how to be in compliance with Canada Revenue Agency (CRA) tax obligations.

The three most common structures are Sole proprietorship, Partnership, and Incorporation.

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