Selling Shares of an Active Business to Family Members in Canada: A Comprehensive Guide to Tax Implications|Business Operations|Legal Requirements

Selling shares of an active business to family members can be a great way to keep your business in the family and ensure its long-term success. However, there are important considerations to keep in mind when doing so in Canada. In this blog post, we will explore the tax implications, impact on business operations, and legal requirements for selling shares to family members in Canada.

Tax Implications of Selling Shares to Family Members

When selling shares of an active business in Canada, capital gains tax may apply to any profits made from the sale. Additionally, when selling to family members, the Canada Revenue Agency (CRA) may consider it a non-arm’s length transaction, which means they could view the sale price as lower than what would be received if selling to an unrelated third party. As a result, additional taxes may be assessed on the transaction to ensure the appropriate amount of tax is being paid.

To avoid this, it’s important to work with a tax professional to determine the fair market value of the business and ensure the shares are being sold at a fair price. This will help to avoid any potential penalties that may be assessed on the transaction.

Impact on Business Operations

Selling shares of an active business to family members can also have an impact on business operations. This may be due to changes in decision-making processes, governance structure, and management. To ensure a smooth transition, it’s important to plan for management succession and set up a formal governance structure, such as a board of directors.

Legal Requirements for Selling Shares to Family Members

There are legal requirements that must be considered when selling shares to family members in Canada. It’s important to draft a shareholder agreement that outlines the rights and responsibilities of each shareholder, as well as any restrictions on the transfer of shares. This agreement will ensure clarity on the transfer of shares and the obligations of each shareholder.

Conclusion

Selling shares of an active business to family members in Canada can be a great way to ensure the long-term success of your business. However, it’s important to work with a tax professional and have a plan in place for how the business will be managed after the sale to ensure a smooth transition and avoid any potential legal or tax issues. By understanding the tax implications, impact on business operations, and legal requirements, you can successfully sell shares to family members while protecting your business interests.