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Bill C-208: Long-awaited Relief for Family Businesses and Intergenerational Transfers

24-Jun-21

By Michelle Fong and MaryAnne Loney

Updated July 27, 2021 in response to a Department of Finance News Release on July 19, 2021.

We will continue to provide updates as they arise.

A change just made to the Income Tax Act (“ITA”) will likely save families significant taxes when transferring their family businesses to the next generation.

Many families want to pass their business to the next generation. Previously, sections 55 and 84.1 of the ITA often applied to prevent tax-efficient intergenerational transfers. It’s been a long-time complaint of those holding qualified small business corporations, farming corporations, and fishing corporations that this was unfair – that a transfer to a third party had better tax results than an intergenerational transfer within the family.

Bill C-208 (the “Bill”), which received Royal Assent on June 29, 2021, aims to change that. It provides exceptions to section 55 and section 84.1.

For background, section 55 deals with intercorporate dividends. These can be used for “butterfly” transactions, which is when shareholders of a corporation seek to divide the corporation’s assets between their respective holding corporations. By utilizing share redemptions in the reorganization, if subsection 55(2) does not apply, the transfer of assets can effectively be treated as a tax-free intercorporate dividend under section 112. The anti-avoidance rule in subsection 55(2) applies to most unrelated party transactions and will convert the tax-free intercorporate dividend into a capital gain instead.[1] Section 55(5)(e) also deemed siblings to be unrelated persons, therefore making it difficult for families to divide the family corporate business between their siblings’ respective corporations.

Section 84.1 is an anti-avoidance rule designed to prevent shareholders from taking corporate profits out as capital gains instead of dividends. It also causes the cost base (which can be returned tax free) arising from claiming the lifetime capital gains exemption (“CGE”)[2] in non-arm’s length transactions to be ignored for the purposes of section 84.1. When section 84.1 does not apply, an individual disposing of qualified small business corporation shares or shares in a qualified farming or fishing corporation to a purchaser corporation can shield the resulting capital gains tax with their CGE. The CGE is indexed each year, being $892,218 currently. Those who operate qualified farming or fishing corporations have a bumped-up CGE of $1,000,000. However, section 84.1 will deem the transfer to a non-arm’s length purchaser corporation to be a dividend instead of a capital gain, effectively preventing the application of the CGE for transfers to a family member’s corporation.

In the Bill, section 55(5)(e) is amended to deem siblings to be unrelated and dealing at arm’s length if the dividend was “received or paid, as part of a transaction or event or a series of transactions or events, by a corporation of which a share 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 allows siblings to do an unrelated party butterfly of a qualified small business corporation or qualified farming or fishing corporation.

Section 84.1(2) is also amended to deem the purchaser corporation to be arm’s length when selling qualified small business corporation shares or a share of the capital stock of a family farm or fishing corporation, if certain conditions are met. These conditions include that the purchaser corporation is controlled by the taxpayer’s adult children or grandchildren and the purchaser corporation does not dispose of the shares for at least 60 months. This would exclude such transactions from the application of section 84.1 and the capital gains from the transfer could then be eligible for the CGE.

Together, the amendments to the ITA in this Bill appear to offer long-awaited relief for our clients with family business corporations.

Unfortunately, there are significant problems with the Bill. It is very poorly drafted, likely because it was not drafted by the Department of Finance but instead was a private member’s bill. Not only could it arguably allow tax planning well beyond the scope of its purpose, much to the dismay of the Department of Finance, but it also leaves many unanswered questions regarding how it will apply and interact with other provisions of the ITA.

July 19, 2021 News Release

As a result, on July 19, 2021, a News Release was issued by the Department of Finance. This News Release acknowledged that the Bill’s amendments are effective upon Royal Assent[3] and indicated that the Government of Canada is committed to facilitating genuine intergenerational share transfers. However, it also stated that it intends to introduce amendments. The News Release indicated any amendments made will not be effective until November 1, 2021 or later.

This means that the Bill, with all its flaws, is currently in force. As a result, in theory, if parents meet the requirements, they can sell their shares to corporations owned by their children and grandchildren, have it taxed as a capital gain and claim the CGE. This is potentially a huge opportunity for business owners who want to transfer their businesses to their children and grandchildren.

However, anyone looking to pursue such a transfer should understand there are many unanswered questions about exactly what the requirements actually are. As a result, while the Bill brings huge opportunities, trying to take advantage of those opportunities carries risks. Families seeking to take advantage of the Bill should only proceed after careful consultation with their tax advisors.

For some families it will make sense to proceed with transactions that will aim to take advantage of the Bill in its current form. For other families, it will make more sense to wait until the Government has introduced its amendments which, while likely being more restrictive than the current legislation, will hopefully also be clearer and more coherent.

If you have a family business, we would be happy to discuss the potential planning opportunities this new legislation opens up now and into the future.

If you have any questions, please contact our Tax Team. We will continue to provide further updates as more information becomes available.


[1] The anti-avoidance rule applies to most unrelated party butterflies because, unlike related party butterflies, an unrelated party butterfly must meet several difficult criteria to be excluded from the rule.

[2] Section 110.6.

[3] A previous News Release had suggested otherwise, in apparent contravention of Canadian law.

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