Tax relief for transfers of businesses between siblings

The tax legislation was recently modified to introduce specific amendments to section 55 of the Income Tax Act to better accommodate the transfers of businesses between siblings.

Subsection 55(2) is an anti-avoidance rule that, in certain situations, recharacterizes tax deductible intercorporate dividends into capital gains. Paragraph 55(3)(a) is an exception to this rule and applies to deemed dividends received on the redemption, acquisition, or cancellation of a share between related parties. Paragraph 55(3)(a) is commonly used to divide a business on a tax-deferred basis where the shareholders are related.

Subparagraph 55(5)(e)(i) was amended to provide an exception to the rule that deems siblings not to be related for the purposes of paragraph 55(3)(a). For this exception to apply, subparagraph 55(5)(e)(i) requires that the dividend be received or paid by a corporation of which a share is a qualified small business corporation share or a share of the capital stock of a family farm or fishing corporation. Prior to this amendment, siblings generally needed to rely on the so-called “butterfly rules” in paragraph 55(3)(b) to divide a business between themselves, which impose many restrictions and often require an advance income tax ruling to be obtained given the complex nature of these rules.

This is a much welcome change to the tax legislation. Please do not hesitate to reach to your Crowe BGK advisor to learn more about this.