The Time Is Now To Level The Playing Field For Family Businesses
Family businesses across our country are at risk. We are facing a crossroads with what the future of family businesses looks like and whether that term “family business” will exist for the next generation. And we aren’t talking about the biggest challenges they already face when working with family members, but a more complex issue that challenges them to keep their business in the family.
The problem is this little-known tax consequence to passing on a family business to a family member. Sounds absurd right? But it exists and it is an issue Canadians need to pay attention too. It could possibly be what we would describe as one of the largest gaps in our federal tax policy; imagine building a business, providing jobs for Canadians, contributing to our national GDP and then wanting to exit your business and facing a massive tax consequence if you want to sell to a family member.
How our current Federal Income Tax Act reads grossly disadvantages keeping family businesses in the family. When a business owner looks to retire and wants to transfer or sell their corporation to a child or relative’s holding company, the sale is taxed as a dividend instead of a capital gain, which is taxed at a higher rate. That same business could be sold to a stranger and it’s considered a capital gain, which makes it eligible for a lifetime capital gains exemption (LCGE).
This flaw has existed in the Federal Income Tax Act for years and we have had enough. Over the past 12 months, several reports have been released focusing on family businesses in Canada and releasing staggering statistics about the number of businesses owners looking to retire. The Canadian Federation of Independent Business (CFIB) released its November 2018 report “Getting Transition Right” and it states more $1.5 trillion dollars of assets are set to transfer over the next decade. That’s 72% of all current business owners planning to leave their business in the next ten years.
The Conference Board of Canada and the Family Enterprise Xchange Foundation (which we are a proud member of) released its report “Family Business Matters” earlier this month. Among other statistics, it showed family enterprises directly supporting more than 6.9 million jobs in our country and contributing more than $575 billion to our national GDP.
And Deloitte Private released its Global Family Business Survey in August and showed 50% of Canadian family businesses intend to pass both management and ownership of the firm to the next generation. Our bet is that number will significantly decrease when tax consequences are realized.
Since the spring, we have been working with the Peterborough Chamber of Commerce to help us raise the profile of this issue and try and affect change at the policy level. A resolution was put forward asking the government to adjust the Federal Income Tax Act so that the sale of a business to a family member is taxed as a capital gain. The resolution passed at the Canadian Chamber of Commerce National Convention on September 22.
The current Income Tax Act has the potential to significantly impact the landscape our Canadian economy. The framework of our country has been built on the foundation of the family business owners; small and medium sized businesses that have been able to pass on, in their families, from generation to generation. Those family businesses are at risk because it is becoming unsustainable to sell to a family member. We’ve never been asking for a different playing field for family businesses, we just want a level playing field.