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By Gemma L. Brown, Partner and Alexandra Philippot, Articling Student-at-Law

Bill C-208, which was introduced by Larry Maguire, MP from Brandon-Souris, makes amendments to the Income Tax Act by aiming to lessen the tax burden on intergenerational transfers of small businesses, family farms or fishing corporations. This bill addresses a gap in the Income Tax Act that made it more costly for small business owners to transfer shares of their business to their children than to an outside party (arm’s length party). 

The Bill received Royal Assent on June 29, 2021 and on June 30, the Department of Finance Canada announced that it proposes to introduce legislation regarding the amendments in Bill C-208 effective January 1, 2022.    In a July 19 press release, the Department of Finance acknowledged that Bill C-208 is law and clarified that the July 19 press release replaces the one released on June 30. However, the Department indicated that legislative amendments would be forthcoming to make sure that the provisions of the ITA facilitate genuine intergenerational transfers and are not used for artificial tax planning or “surplus stripping” purposes.

Changes to Section 84.1 of the Income Tax Act: Transfer of a family/farm business to the next generation

Section 84.1 of the Income Tax Act currently characterizes a capital gain as a dividend when a parent sells their shares of the business to a family member’s corporation (non-arm’s length party). The parent, therefore, cannot use their capital gain exemption to offset what would have been a capital gain. This may translate to an additional tax burden of over 20%, depending on the province. So the tax disadvantage on a sale to a child is essentially paying tax on some amount of capital gains that could otherwise be covered by the capital gains exemption on a sale to an arm’s length purchaser.  The top tax rate on capital gains is 25.2%, however the actual effective tax rate will depend on the amount of the gain and the parents’ marginal tax rates. The current tax regime therefore makes it more attractive for family farms or businesses to be sold outside of the family, as the parent would be able to use the lifetime capital gains exemption, and the balance not sheltered, would be taxed at capital gains rates.

Bill C-208 amends subsection 84.1(2) of the Income Tax Act to carve out when shares are qualified small business corporation shares or shares of the capital stock of a family farm or fishing corporation ((“Qualifying Shares”) within the meaning of subsection 110.6(1) of the Income Tax Act, requiring certain thresholds to be met) are sold to a corporation (“Purchaser Corporation”), and the following conditions are satisfied;

  1. The transferred shares are Qualifying Shares;
  2. The taxpayer and the purchaser corporation are deemed to be dealing at arm’s length;
    1. If the purchaser corporation is controlled by the children or grandchildren of the taxpayer who are at least 18 years or age; and
    1. If the purchaser corporation does not dispose of the shares within 60 months (5 years) of their purchase (Note: other than by reason of death).

To be eligible for this tax treatment, it is also a requirement that the business owners obtain an independent assessment of the fair market value of the shares. This valuation can cost thousands of dollars, and therefore, careful planning and record keeping by the Corporation is essential.

If the new conditions of subsection 84.1(2) are met, subsection 84.1(1) should not apply to the disposition, thus allowing the parent to claim a capital gains exemption in the same manner as a sale to an outside third party.  Eligible individuals are entitled to a cumulative lifetime capital gains exemption to shelter net gains realized on the disposition of qualified property. The capital gains exemption is $$883,384 (indexed after 2020) for qualified small business corporation shares and $1,000,000 for family farm or fishing corporation shares.

However, there are certain limitations which may prevent individuals from accessing these rules in certain circumstances. Bill C-208 contains a provision which precludes access to the capital gains exemption when the taxable capital employed in Canada exceeds $10 million. It also completely eliminates access where taxable capital is $15 million or more. A corporation’s taxable capital is, in general, the total of its shareholder’s equity, surpluses and reserves, and loans and advances to the corporation, less certain types of investments in other corporations.  This limitation further limits the applicability of this rule when family businesses have a lot of capital.

  1.  Changes to Section 55 of the Income Tax Act: Restructure of a family business involving siblings

The Income Tax Act contains anti-avoidance rules which forbid taxpayers from misusing the Act to achieve tax benefits contrary to Canadian policies. Section 55 contains an anti-avoidance rule which converts tax-free intercorporate dividends (dividends paid by a corporation to another corporation that owns shares of the payor) into capital gains. Effectively, this takes something that would be non-taxable, an intercorporate dividend, to something that is taxable, a capital gain.

While certain related party transactions are excluded, under the current provisions, siblings have been considered not to be related under this provision. Bill C-208 treats siblings as related parties where the dividend was received by a corporation where the shares of the capital stock is a qualified small business corporation share, or a share of the capital stock of a family farm or fishing corporation. This would result in the intercorporate dividends being tax-free in these particular instances.

Bill C-208 amends subparagraph 55(5)(e)(i) of the Income Tax Act as follows:

  1. A person is deemed to be dealing with another person at arm’s length and not to be related to them;
  2. If the person is their brother or sister;
  3. Except where the dividend was received or paid, as part of a transaction or a series of transactions, by a corporation where the shares of the capital stock is a qualified small business corporation share, or a share of the capital stock of a family farm or fishing corporation (within the meaning of subsection 110.6(1)).


On July 19, 2021, The Government of Canada stated that they intend to amend the Income Tax Act in accordance with Bill C-208, while safeguarding against unintended tax avoidance loopholes which may have been created by the Bill. They have further stated that they intend to draft legislative amendments and upon completion, will publish legislative proposals to be introduced in a bill to apply as of the later of either November 1, 2021 or the date of publication of the final draft legislation.

The amendments to Bill C-208 would address:

  1. The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild;
  2. The level of ownership in the corporation carrying on the business that the parent can maintain for a reasonable time after the transfer;
  3. The requirements and timeline for the parent to transition their involvement in the business to the next generation; and
  4. The level of involvement of the child or grandchild in the business after the transfer.

These amendments are intended to ensure that Bill C-208 is utilized for genuine intergenerational transfers.

While Bill C-208 should make it more tax-efficient for business owners to transfer their business to the next generation, it should be remembered that this Bill does not amend the applicability of other anti-avoidance provisions. Section 245 of the Income Tax Act sets out the General Anti-Avoidance Rule for Canadian transactions. A transaction that creates a tax benefit may still be viewed as an avoidance transaction if the transaction was not arranged primarily for a bona fide purpose other than to obtain a tax benefit. To prevent undesirable consequences, we recommend that if you are planning to transfer family business property to the next generation, you contact our office for assistance.

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