There are times when family succession is not forthcoming, and passing on the business within the family is risky. In such cases, the solution is to maximize the value of the business, ensure that the shares qualify for the capital gains deduction on eligible small business shares, and find a buyer.
Using your family members' capital gains deduction
Each individual has a capital gains deduction account of $1,016,836 (in 2024 – this amount is indexed annually). This account can be used to reduce capital gains realized on eligible small business shares.
The advantage of holding eligible small business shares through a trust is that this deduction is multiplied with each beneficiary (family member) entitled to it. In addition, since only 50% of the gain is taxable, it is possible to allocate only 50% of the gain to a family member to benefit from the full deduction.
The following two situations illustrate the taxable benefit of a family trust:
Paul owns 100 Class “A” shares in his operating company, which runs a car garage. His shares originally cost $100 and now have a fair market value of $6 million (Enterprise Value).
Here’s the calculation when selling his company’s shares to a third party:
| Description | Amount |
| Cost of shares | $100 |
| Fair market value | $6,000,000 |
| Capital gain | $5,999,900 |
| Paul’s capital gains deduction | $1,016,836 |
| Subtotal | $4,983,064 |
| Final taxable capital gain | $2,491,532 |
| Personal marginal tax rate | 53,305% |
| $1,328,111 |
The 100 Class “A” shares are now held by a family trust, whose beneficiaries are Paul, his spouse and three (3) minor children.
| Description | Amount |
| Cost of shares | $100 |
| Fair market value | $6,000,000 |
| Capital gain | $5,999,900 |
| Paul’s capital gains deduction | $1,016,836 |
| Your spouse’s deduction | $1,016,836 |
| Deduction for your first child | $1,016,836 |
| Deduction for your second child | $1,016,836 |
| Deduction for your third child | $1,016,836 |
| Subtotal | $915,720 |
| Final taxable capital gain | $457,860 |
| Personal marginal tax rate | 53,305% |
| Tax payable | $244,062 |
Between the two situations, there is a tax differential of around $1,084,048, and this could be even more advantageous depending on a different distribution of the final taxable capital gain.
As can be seen, as a sole proprietor, to benefit from this advantage, the business must have a minimum value of over $1 million for the trust to be useful at this level.
In addition, the purchaser of your business must agree to buy your shares, not your assets. In many businesses, it’s the assets, not the shares, that are sold, since the acquirer won’t want to inherit your company’s past.
Other advantages of family trusts
- Asset protection: your assets that are in the trust patrimony are protected from your creditors, subject to certain exceptions since the trust cannot be used to make yourself insolvent or used to get out of a known lawsuit;
- Income splitting between family members still possible, but no longer limited as of July 12, 2017;
- Transfer of tax-free liquidity between connected corporations if the structure meets certain criteria.
Main disadvantages
- Set-up costs: can vary from $3,000 to $5,000 for the creation of a trust;
- Accountant’s fees: these can vary from $600 to $1,500;
- Adds complexity to your administrative management: you’re adding an entity to your structure, and the trust must have its own bank account and pay its own taxes. The decision of the trustees must be made by a majority vote, and preferably in writing.
For a free, confidential analysis of your business before you consider selling it
This analysis will help you answer the following questions:
1. What is my business worth?
2. How much tax will I have to pay if I sell my business?
3. How do I sell a business?
4. Are there any buyers for my business?
