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Tax Tips for Businesses: What to Watch For

Fiscalité | Vente entreprise | Raymond Chabot Grant Thornton

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In 2024, some tax issues have changed with regard to corporate sales and employee retention. Which ones and what will they change for you?

First of all, owners who are thinking of transferring control of their business to one or more members of their immediate family will benefit, as of 2024, from new measures that will make the transition easier, thanks to the harmonization of Québec’s taxation of intergenerational transfers of family businesses with the new rules announced by the federal government in its 2023-2024 budget.

Transfer of a family business: a tax reduction of over $542,000

To put it plainly, this is the greatest tax gift to family business owners in a long time. An entrepreneurial couple selling their business to family members for $1 million, for example, could each benefit from a tax reduction of some $266,550 instead of giving this money to the tax authorities.

To prevent family business owners from giving their children an advantage when transferring a business, the government had adopted tax measures that many consider unfair. Government authorities took it for granted that parents were transferring the business at a price lower than the fair market or open market value, thereby enabling them to pay less tax.

Smoother rules for corporate sales

Since 1985, the Income Tax Act has stipulated that entrepreneurs are exempt from capital gains tax if they sell their business to a third party, but are taxed at a rate of up to 48.7% if a family member buys the business.

In 2016, the Québec Finance Minister introduced amendments to the Québec Taxation Act that made it easier to transfer a family business to members of the same family, but subject to a number of conditions.

At the federal level, new measures were adopted in 2020, but under different conditions to those in Québec, which made them difficult to manage. Full harmonization of the rules has changed all that.

The new measures indicate that the transfer must be made immediately within 36 months or gradually over a period of 5 to 10 years. The tax authorities have also removed the requirement to provide the Canada Revenue Agency with an independent valuation of the fair market value of the sale of the business. However, managers have every incentive to transfer their business to the next generation at the right price, as the government reserves the right to assess the transaction for a period of between 6 and 13 years.

Labour shortage: tax breaks for employees

Faced with a labour shortage, companies need to be increasingly imaginative when it comes to recruiting and retaining employees. From cash bonuses and reimbursement of public transport costs to the granting of shares and other incentive programs, here are some initiatives that will help companies retain and attract employees.

Performance bonus in cash or shares

The annual cash bonus, paid on the basis of performance, is the most common way of rewarding employees. Bonuses paid in shares are much less common, but deserve just as much consideration, since they have no tax impacts for the company and are highly advantageous from a tax point of view for employees.

Stock option plan

More widespread in listed companies, this formula enabling employees to subscribe to their employer’s shares should also be more widely used by SMEs. However, managers must accept a certain dilution of the shareholding, except in the case of preferred shares. The percentage of a company’s shares reserved for stock options usually varies between 5% and 15%.

A direct equity stake

The purchase of shares at a reduced price is another type of incentive that enables employers to reward and retain key employees.

Creation of a joint stock company

Setting up a joint stock company can be a useful way of facilitating the transfer of a business to key employees. The company then pays dividends that enable employees to accumulate the capital they need when they eventually buy an interest in the organization.

Creation of an employee trust

Legislative changes currently under consideration are expected to make the creation of an employee benefit trust much more attractive from a tax perspective. This formula allows employers to set up a trust in order, once again, to allow employees who are beneficiaries of the trust to buy out the company. Employers then retain greater control over the company’s shareholding than in the case of a stock option plan.

Gifts and rewards

Employers can treat their employees to gifts and rewards that will not be considered taxable benefits if their value does not exceed $1,000 (Québec tax) or $500 (federal tax).

Public transport allowance

Paying for public transport for employees is a financial incentive that entitles employers to tax deductions equal to twice the expense incurred.

In 2024, should we incorporate or not?

Many self-employed people or registered business owners wonder whether it would be advantageous to incorporate. Incorporation certainly offers a number of tax advantages, and the situation must be analyzed on a case-by-case basis.

However, companies generating net income of at least $50,000 or more should look into the matter. Incorporation brings with it tax advantages specific to this type of legal vehicle. In return, they must accept certain constraints, in particular the obligation to file financial statements and tax returns separate from those of the owner, unlike self-employed workers or registered businesses.

Lower tax rates

One of the main advantages is the tax rate of an incorporated company compared with that of an individual. There is a major difference, where a company will be taxed at rates of between 12.2% and 26.5%, while an individual’s marginal rate can rise to over 53.31%.

Capital accumulation

At the same time, the low tax rate allows the incorporated company to accumulate more capital more quickly, which it can use to make investments and expand.

More flexible remuneration

Incorporation offers greater flexibility in terms of remuneration and taxation. It is possible to pay yourself a salary or dividends and thus choose a remuneration with a more advantageous tax rate than that of a self-employed person or income from a personally-operated business.

Tax deferral

An incorporated company can defer the payment of taxes, but be careful: this is a deferral, not an elimination.

Granting of tax credits

An incorporated business is entitled to tax credits, in particular the Tax Credit for Investments and Innovation (C3i), which allows a business to reduce its costs for the purchase of manufacturing and processing equipment, as well as computer equipment, including management software packages. This credit varies between 15% and 25% for the years 2024 to 2029.

Company versus legal entity

A business and an individual have separate legal personalities. That’s why incorporation can help protect personal assets in the event of a lawsuit, since it’s usually the business that will bear the cost, not the self-employed person or the registered business.

For the benefit of employees

Incorporation gives businesses with employees more options, particularly when it comes to remuneration. In some cases, it allows them to avoid losing benefits linked to government programs such as child benefits, Old Age Security pension or certain tax credits.

Capital gains deduction

A business that can be sold will benefit from the capital gains deduction if it is incorporated.

To determine what is most advantageous for you from a tax point of view, consult your expert. They will help you make the right choices.

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