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Thursday, my colleague and office manager of Press in Ottawa, Joël-Denis Bellavance, told us that a bill to modify the tax rules surrounding the transfer of ownership of a business was awaiting approval in the Senate and that there was still a week to complete third reading and allow it to pass.
This bill aims to correct a loophole that has become embedded over time in the Income Tax Act which means that the tax treatment of the capital gain arising from the sale of a business is not the same whether the transferee of the operation is a family member or an outside buyer.
If a business is sold to an outside buyer, the selling owner is entitled to a capital gain tax deduction of up to $ 500,000, depending on the value of the business, whereas if the transfer is made with a family member, the selling owner is not entitled to the capital gains deduction.
The establishment of these two weights, two fiscal measures of the Income Tax Act dates back to the 1990s, when the federal government decided to assert its will to fight tax evasion, but today, it squarely penalizes the transfer of ownership of a business within the same family.
The Center de transfert d’entreprise du Québec (CTEQ) carried out a study in collaboration with professors Marc Duhamel and Louise Cadieux, from the University of Quebec in Trois-Rivières, and François Brouard, from Carleton University, which demonstrates how much it can cost a selling owner to want to transfer his business to a family member.
“Small business owners who are not eligible for the capital gain deduction lose between 6% and 27% of the capital gain realized depending on their level of taxable income. For an SME whose proceeds of disposition are 2 million, the additional income for the owners is in the order of $ 120,000 to more than half a million ”, note the authors of the study.
On a large scale, 10,000 small business owners who wish to sell their business to a family buyer “could save between $ 245.6 million and up to just over $ 1.04 billion, if they were eligible for the same deduction of the gain. in capital than those who prefer to transfer to external buyers, ”continues the CTEQ study.
A movement at its peak
Does it seem a little big to you that 10,000 SME owners in Quebec wish to sell their business to members of their family? Demographics tell us just the opposite. Between 2017 and 2022, the CTEQ has already estimated that no less than 60,000 baby boomers, owners of Quebec businesses, will transfer ownership to buyers from their families or from outside.
“This is the movement that we are observing. We expected a peak in 2020, but the pandemic delayed the process of many entrepreneurs who decided to keep the reins during the crisis and postpone the sale. Up to 15,000 business sales are expected in 2021, ”says Vincent Lecorne, CEO of CTEQ.
The tax disadvantage of transferring business ownership to family buyers hurts entrepreneurs who rely on the gain as a retirement fund. A difference of $ 500,000 in income from the sale is starting to count.
However, selling to a family buyer ensures greater viability of the business since, often, the selling owner will remain as a resource person or as an ambassador. And in Quebec, we have a lot of companies with deep roots in the region that will not necessarily interest buyers from outside.
Quebec has changed over the years its tax rules so as not to penalize the sale to family buyers, but Ottawa persists in wanting to tax more owners who want to pass their business to their children, always under the pretext of fighting tax evasion. .
For the third time in six years, the federal government has the opportunity to correct this fiscal inequity and it has one week to do so before the adjournment of the session and the start of an upcoming election campaign that would kill the soap opera. this new bill. Yet it is now that the future of thousands of SMEs is being played out in all regions of Quebec.
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