How to Transfer Your Business to a Family Member
If you want to plan the handover of your business to a family member, you can choose to either sell the company to them or implement an estate freeze.
Selling a Business to a Family Member
Some business owners choose to sell their company to a family member for a nominal fee. As of June 29th, 2021, Canada’s Bill C-208 has made transferring a business to your children or grandchildren easier. Before this bill was passed, business owners who sold their company to family members would be taxed at a significantly higher rate than if they sold the business to a non-related party.
Now, you are permitted to sell your business to a child or grandchild at the lower tax rate, and you may reduce the total tax payable by using the capital gains exemption. Note that in order to sell your business to a family member and avoid high taxation, you will need to prove that the family member has a significant amount of involvement in the business.
While this can be the right choice in some cases, selling your company to a family member does mean there will be taxes to pay and it completely removes any control over the company that you have, which is why many people opt to transfer their business via an estate freeze instead.
Implementing an Estate Freeze
Sometimes, implementing an estate freeze in order to transfer your business to a family member is the best option. This is because it allows you to avoid any income tax and retain some control over the business through fixed shares.
In an estate freeze, you exchange your shares in the company for preferred shares that have a fixed value, and common shares are issued to the family member you wish to take over the company. This process “freezes” the current value of the company through your preferred shares, and any subsequent business growth is reflected in your successor’s common shares.
If you are unsure which option is right for your business, get in touch with the lawyers at Munro & Crawford today. Our firm has years of experience helping business owners plan the succession of their companies and we are committed to finding the best possible outcome for our clients.