Transferring a business to a Canadian family member is an important decision that requires careful consideration and planning. It can be a great way to ensure the continuity of your business, allowing it to remain in the same family for generations. Or do you want to send additional income to your family so they can stay ahead of the recession? Either way, there are many legal and tax implications involved with such an arrangement, so it’s important to understand all of them before proceeding. In this post, we’ll take a look at some of the key points you should consider when transferring a business in Canada to a family member.

The Long-Lasting Benefits Of Transferring Your Business To A Relative

One of the main benefits of transferring your business to a Canadian citizen family member is that you can retain control over how your company will be managed. This gives you peace of mind, knowing that the business is being passed on to someone who is familiar with it and has your best interests in mind.

Did you know a business transfer is an opportunity to ensure financial security for the members of your family, even if they don’t work directly with the business, day to day? You can create a positive impact on their future without locking them into one lifestyle. How? Explain your situation to us on a free consultation call. At ACM CPA, we want to understand your goals before we offer financial expertise. But keep reading, and you’ll learn the basics.

Avoiding Tax Implications Is Key When Transferring Your Business

When transferring a business to a Canadian family member, there are several tax implications you should be aware of. Generally speaking, if you transfer shares or assets from your company to another person who is related by blood or marriage, such as a spouse or child, this will be treated as an “arm’s length” transaction, and no special tax considerations will apply. However, if you transfer these shares or assets to someone unrelated to you, then capital gains tax may be applicable. Before you make the transfer, you should talk to your accountant or financial advisor about these things to ensure you understand any possible tax consequences.

The Biggest Mistake You Can Make Is “Selling” Too Low

A consequential misstep we frequently see business owners make is trying to sell their family business to relatives for a small sum, like one dollar. If it were that easy, everyone would do it, and businesses would get passed around like salt shakers.

Let’s imagine, for illustration purposes, that you give your son the business. It objectively has a value of $500,000, but you sell it to him for a ceremonial $1. Very severe implications would follow.

First, the Canada Revenue Agency (CRA) will visit and do their own evaluation of your business’s value. They will determine its fair market worth by considering the physical assets, the company’s potential for future growth, the revenue, and the company’s standing in the industry. The CRA will then forcibly change your company’s sale price from $1 to $500,000, and they’ll add capital gains tax; this is often a significant sum of money.

To make matters worse, whoever buys your company won’t see an increase in their cost basis. What’s that? Your cost basis is your investment in an asset and, more importantly, the amount used to determine your profit or loss when you sell it. The higher your basis, the less gain to be taxed, and the lower your tax bill.

Since your son has “only invested a dollar,” but profited a ton, his taxes will be much higher than they need to be.

Keep 100% Of The Taxes: “Estate Freezes” And “Rollovers”

So how can you properly hand over a family business to your family members? Typically, the best way to handle it is by using an estate freeze. It allows business owners to pass ownership and control of a key family asset, such as the family business, to the next generation. With this method, you won’t pay any taxes at all if you transfer your family firm to a family member.

How do you go about freezing an estate? You must first establish a family trust. A family trust is a straightforward legal document that declares a holding of your company’s shares. The family trust must be created by a qualified legal professional who specializes in estate planning. The trust can then be designed to protect your business from creditors, lawsuits, and other risks. After that, the transfer of the business’s shares can take place using what is known as a rollover, a process that allows you to transfer ownership of the company to another family member without paying capital gains tax.

Get Your Legal Paperwork Sorted Out

When you transfer a business to a family member, there are various legal considerations you will need to take into account. It’s important to ensure that all paperwork related to the transfer is completed accurately and in accordance with relevant laws and regulations. This includes transferring ownership of any assets or property that are held by the business, as well as registering or canceling any licenses or permits associated with the company. You could also protect yourself from future financial liabilities associated with your business post-transfer, such as obtaining insurance coverage.

Your best bet is to immediately obtain legal advice from an experienced lawyer; they’ll explain the best way to transfer ownership while protecting both parties involved. You also need to consider whether it is necessary for the new owners of your company to enter into contractual agreements with existing shareholders or employees. This can help ensure that all parties involved have the same understanding regarding their rights and obligations.

If you’re confused about legal forms or overwhelmed with paperwork, see a professional instead of ignoring it.

You’re Almost There: Send Common Shares To Your Relatives

The last step is issuing common shares to your family trust, along with shares of its stock. Common shares of the family business are held by the family trust and will increase in value over time, as is typical for common shares.

The beneficiaries of the trust, your family members, will be given credit for that growth.

Yup, you can do a lot by moving shares around. For example:

• You can add your spouse as a shareholder and benefit from the tax breaks for having multiple shareholders, especially if they’re in a lower tax bracket.
• You can send additional income to your family by creating a holding company. Add your relatives as shareholders; they’ll be able to receive dividends paid out by the corporation.

An Expert Can Take All This Off Your Hands

Both parties will benefit from thoroughly considering these tax and legal implications before transferring a Canadian business to a family member. Having accurate knowledge about these issues will help you make informed decisions and avoid potential risks down the road. By following the steps outlined above, you can successfully transfer your business to a family member and save yourself some tax money.

It’s important to work with a CPA when transferring your business to a family member, and luckily we specialize in estate planning and tax compliance. Contact us at ACM CPA to learn how we can help with your family business transition. We’ll make sure your business transfer goes as smoothly and efficiently as possible.