Budget proposals on business sales could affect brokerage owners

The big deal for Canada’s P&C insurance industry in 2023’s federal budget was a $31.7 million commitment over three years to protect households at high risk of flooding and without access to adequate insurance.

But there was some less-noticed news.

The Mar. 28 proposed budget also contained two changes that could affect how P&C brokerage owners sell their businesses, and a third with possible implications for future industry regulation.

First are proposed amendments to Bill C-208, which addresses intergenerational business transfers. The measures would apply to transfers on or after Jan. 1, 2024 and include new conditions that would need to be met for a business transfer to qualify as ‘a genuine intergenerational transfer.’

The proposed changes are intended to address what the government saw as insufficient safeguards and would prevent the conversion of dividends to capital gains to take advantage of the lower tax rate afforded to capital gains — also known as surplus stripping — without a genuine transfer of a business between family members taking place.

Since Bill C-208 received royal assent in June 2021, Finance Canada has been signalling their intention to introduce safeguards to respond to its concerns about potential tax avoidance, noted Peter Braid, CEO of the Insurance Brokers Association of Canada (IBAC).

“Business transfers that take place within the brokerage industry — for example from a parent to an adult child — are indeed genuine intergenerational business transfers,” he told Canadian Underwriter. “At the end of the day, genuine intergenerational business transfers will still benefit from the new legislative landscape established by Bill C-208.”

Proposed new conditions for a transfer to qualify as genuine address issues the government had with Bill C-208’s framework in the areas of transfer of control, economic interest and management of the business, and in the degree of involvement of the adult child in the control and running of the business.

To provide flexibility to meet the new conditions, the government proposed two options: the immediate intergenerational transfer (three-year test) based on an arm’s-length sale term; or a gradual intergenerational business transfer (five-to-10-year test) based on traditional estate freeze characteristics.

“The new conditions proposed by Finance Canada, including the two options for either an immediate or gradual transfer, provide some flexibility and are fair and reasonable,” said Baird. “We also appreciate that the new requirements become effective January 1, 2024, giving business owners time to plan and prepare.”

A second ownership transfer option that could impact P&C brokerage owners is contained in budget documents detailing employee ownership trusts (EOTs), a structure that will allow groups of employees to purchase businesses over time.

EOTs, proposed to take effect Jan. 1, 2024, would give small business owners hoping to sell companies to their employees a new tool to do that. To make EOTs viable, the government proposed exempting them from several existing tax rules, on the understanding that they’ll probably be in place longer than many other types of trusts.

EOTs would be required to hold a controlling interest in the qualifying business, with shares in the business constituting “all or substantially all” of the EOT’s assets. When transferring a qualifying business to an EOT, the shares must be disposed of for no more than fair market value. And the shares must go immediately to an EOT, or a corporation wholly owned by the EOT.

Lastly, an annex section of the 2023 budget document indicated “the government may propose to amend the Bank Act, the Insurance Companies Act, the Trust and Loan Companies Act, the Office of the Superintendent of Financial Institutions Act, and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to provide additional tools to protect the integrity and security of federal financial institutions and to address risks of foreign interference.”

IBAC’s Braid noted the government’s concern in this area is understandable, given current geopolitical context.

“We have no specific detail on how these potential changes may impact the P&C industry,” he said, and added IBAC will monitor any proposed legislative amendments.

“At a high level, our concern at this point would relate to potential new regulatory or reporting requirements that may impact insurance brokers.”

With files from Rudy Mezzetta and Melissa Shin, Advisor.ca.

Feature image courtesy of iStock.com/Gwengoat