Big tax win for brokerage succession plans

Canadian property and casualty insurance brokers are applauding the passage of Bill C-208, which they say will ease the tax burden for brokerage principals who wish to sell their business to family members.

“The changes proposed in Bill C-208 would have a direct benefit for brokerage owners who want to keep the business in the family,” Insurance Brokers Association of Canada (IBAC) CEO Peter Braid said in an emailed statement to Canadian Underwriter Monday. “Bill C-208 will not only support the family succession of brokerage firms and ensure stability for customers, it will also help to maintain the social and economic contributions that insurance brokers provide to their communities…

“We should make every effort to support and encourage the inter-generational transfer of these [brokerage] businesses.”

Bill C-208 applies to the sale of qualified small businesses (such as brokerages) to siblings. It will also make it easier to sell a family business to children and grandchildren who are 18 years of age or older, as Braid points out. “This is anticipated to be the major benefit.”

Before the passage of Bill C-208, Canadian tax law for small businesses favoured broker principals who sold their brokerages to strangers instead of their own family members.

Essentially, that’s because a business sold to a family member is considered a dividend, which is subject to a higher taxation rate. If the same brokerage were to be sold to a stranger, on the other hand, it would be considered a capital gain and eligible for a capital gains exemption, leading to a lower tax rate for the seller.

Under Bill C-208, certain intergenerational transfers will no longer be considered dividends, but rather capital gains, thus levelling the tax playing field between buyers who are family members and strangers.

“This is an issue of equity and fairness,” Braid commented. “Business owners should not be penalized for selling their business to a family member. Tax implications should never be a consideration when making the decision to sell a business to a family member.”

In a fact sheet explaining the impact of the tax inequity, Manitoba MP Larry Maguire cites the example of a couple owning a bakery valued at $2.75 million. If they sold the business to a corporation owned by their children, the tax on the deal would be $736,000. If sold to a stranger, however, the tax would be $272,000.

Maguire first introduced Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation), to Parliament in February 2020. The bill covers Canadian qualified small businesses, farms, and fishing corporations.

IBAC lobbied Canadian MPs for the changes. Braid says insurance brokerages are primarily small enterprises, with 95% of them having annual revenues of less than $15 million.

“In provinces such as Ontario, Quebec and British Columbia, up to 25% of [IBAC] member brokerages are family-owned,” Braid stated. “In smaller provinces and more rural parts of Canada, this number is much higher. In Nova Scotia and Newfoundland & Labrador, for example, the number of family-owned brokerages is 40% and 50%, respectively.”

Bill C-208 passed third reading in the Senate without amendments last week.

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