Bill C-208: Long-Awaited Relief For Family Businesses And Intergenerational Transfers
28 June 2021
McLennan Ross LLP
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A change just made to the Income Tax Act
(“ITA“) will likely save families
significant taxes when transferring their family businesses to the
Many families want to pass their business to the next
generation. However, currently, section 55 and 84.1 of the
Income Tax Act often apply 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“) aims to change that. The Bill recently
passed its third reading in the Senate and is expected to receive
Royal Assent shortly. It provides exceptions to section 55 and
For background, section 55 deals with “butterfly”
reorganizations. This is when shareholders of a corporation seek to
divide the corporation’s assets between their respective
holding corporations. By utilizing a share redemption in the
reorganization, the transfer of assets could effectively be treated
as a tax-free intercorporate dividend under section 112. The
anti-avoidance rule in section 55 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 deems siblings to
be unrelated persons, therefore making it difficult for parents to
divide the family corporate business between their children’s
(siblings) respective corporations.
Section 84.1 is an anti-avoidance rule related to the lifetime
capital gains exemption (“CGE“).2 An
individual/taxpayer 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 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 deem the purchaser corporation
to be arm’s length if 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 it from the application of section
84.1 and the capital gains from the transfer could then be eligible
for the CGE, assuming it met all other criteria.3
While there are still lots of questions regarding how this
legislation will be applied and anticipation of some future
amendments, this Bill offers long-awaited relief for our clients
with family business corporations.
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
example, the shares disposed were in the capital of a qualified
small business corporation or qualified farming or fishing
corporation. See section 110.6 for other discrete
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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