Bill C-208: a Tax Relief to Transfer Family Business

On June 29, 2021, the Bill C-208 received Royal Assent. Bill C-208 provides for the transfer shares of family business to adult children or grandchildren to receive the same tax treatment as businesses sold to a third party. 

Without Bill C-208, anti-avoidance rule in the Income Tax Act (ITA) treated intergenerational transfers of a business as a dividend rather than a capital gain. Bill C-208 allows access to the lifetime capital gains exemption (LCGE).

·         On June 30, 2021, the Department of Finance announced that it intends to introduce legislation to clarify that the Bill C-208 legislation would apply at the beginning of the next taxation year, effective January 1, 2022.  

·         On July 19, 2021, Minister of Finance confirmed that Bill C-208 apply in law and replaced the June 30 news release.

The following are the two amendments that Bill C-208 made to the ITA:

1. Changes to Section 84.1

Section 84.1 of the ITA does not allow the children to use a corporation to buy share of small business from their parents. However, Parents selling the shares to an arm’s length (unrelated) corporation were able to use the capital gains exemption         to reduce the income tax on the resulting capital gain on the transaction. Bill C-208 allows a sale to non-arm’s length purchasers of the shares to result in a capital gain and the ability to use the capital gains exemption to reduce the income tax.

2. Changes to Section 55

Section 55 of ITA prevents the conversion of what would be taxable capital gain into a tax-free intercorporate dividend. Certain corporate reorganizations that assist in the transition of business or family farm or fishing assets between family membersis allowed but this relief was not allowed for transactions that involved siblings as they were deemed not to be related for purpose of these rules. Bill C-208 allows for siblings to be related for purposes of these rules. This should allow certain corporate reorganizations involving shareholders who are siblings to be accomplished more easily. 

Bill C-208 inadvertently introduce the tax avoidance loopholes " surplus stripping". There will be amendments to address the following issues:

·         The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild

·         The level of ownership in the corporation carrying on the business that the parent can maintain for a reasonable time after the transfer

·         The requirements and timeline for the parent to transition their involvement in the business to the next generation

·         The level of involvement of the child or grandchild in the business after the transfer