4 September 2008 Ministerial Correspondence 2008-0286301M4 - Sale of insurance brokerage business

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Tax treatment of sale of brokerage business.

Position: None taken.

Reasons: General comments only.

September 4, 2008

XXXXXXXXXX

Dear Colleague:

Thank you for your letter received on July 8, 2008, concerning tax policy proposals raised by XXXXXXXXXX .

You indicate that XXXXXXXXXX would like the transfer of a brokerage business within the family to be tax-free in a manner similar to how the rules in the Income Tax Act currently treat fishers and farmers. As well, you would like to know if the tax rules differ depending on whether the fishing or farming business is incorporated before the transfer, and if there is a cap on the size of the business that can be transferred to family members without incurring taxes.

The Act contains property transfer rules that permit a fisher or farmer operating an unincorporated business in Canada to dispose of fishing or farm property to a child on a rollover or tax-free basis. Generally, the fisher or farmer is able to avoid triggering a capital gain and a recapture of tax depreciation by designating as proceeds of disposition, an amount equal to his or her tax cost of such property. That amount then becomes the acquisition cost to the child. The fishing or farm property eligible for this treatment includes land in Canada, depreciable property such as a fishing vessel or farm equipment, and, in certain cases, eligible capital property such as quotas. The property must have been used principally in a fishing or farming business.

A fisher or farmer is also allowed to transfer fishing or farm property to a child by designating as proceeds of disposition, an amount between the tax cost and the fair market value of the property being transferred. The designated amount becomes the child's acquisition cost of the property. A resulting capital gain is not taxed to the extent that it is reduced or eliminated by the fisher's or farmer's $750,000 lifetime capital gains exemption under the provisions of the Act.

The Act contains special transfer rules that apply if a farmer or fisher carries on a farming or fishing business through a corporation or partnership. The effect of these special rules is similar to the rules mentioned above concerning dispositions of farm or fishing property. These special rules allow a farmer or fisher to transfer to a child, shares of a family farm or fishing corporation or an interest in a family farm or fishing partnership by designating as proceeds of disposition, an amount between the tax cost and the fair market value of the shares or interest being transferred.

The above transfer rules do not contain a cap on the size of the business that a fisher or farmer may transfer to his or her child on a rollover basis.

The tax treatment of property transfers by farmers and fishers are discussed in greater detail in chapter 6 of the guides Farming Income (T4003) and Fishing Income (T4004), which are available on the Canada Revenue Agency (CRA) Web site at www.cra.gc.ca.

I would note that the $750,000 lifetime capital gains exemption is available to an individual who disposes of qualified small business corporation shares. Generally, a small business corporation is a Canadian-controlled private corporation, all or substantially all of the fair market value of which is attributable to assets principally used in an active business carried on in Canada, or to shares or indebtedness of similar types of connected corporations.

The active business carried on by a small business corporation is not restricted to farming or fishing and generally may include the business of rendering services. Accordingly, if an individual carrying on a business of providing services to customers as an independent contractor intends to sell the business, he or she may wish to explore the possibility of incorporating the business and then selling the shares. If the corporation's shares meet the conditions in the Act, the individual may be able to reduce or eliminate the capital gain from the sale of the shares by using his or her $750,000 lifetime capital gains exemption.

The CRA is responsible for administering the tax legislation as passed by Parliament whereas the Department of Finance Canada is responsible for developing federal tax policy and amending tax legislation. Whether the Act's property transfer rules applying to farmers and fishers should be extended to other taxpayers is a matter of tax policy. I can assure you that officials at the Department of Finance Canada are aware of these concerns.

I trust that my comments are helpful.

Sincerely,

The Honourable Gordon O'Connor, P.C., M.P.

Tim Fitzgerald, CGA
Tel. (613) 957-8967

2008-028630
July 24, 2008