Owners of family-run small businesses, family businesses and
Fishing companies, especially those that
Intergenerational transfers from these companies should be noted
a significant change in Canadian tax law aimed at
"Match the playing field" between related parties and
Arm length transfers. Bill C-208 (the
"invoice"), an invoice from a private member
the Income Tax Act1 (the1
"plot"), received royal approval in June
02/29/2021.
The bill makes substantial changes to two provisions of the
Act, namely Sections 55 and 84.1. The amended section 55 allows
Siblings to gain access to the related party exception from the capital
Profit deduction provisions in subsection 55 (2) of the Act. Changed
Section 84.1 is considered non-weapons in limited circumstances
Length transaction to be an arm's length transaction. On the
Law comes into force, a shareholder sells shares of qualified
Small business, family business and fishing
Companies can access capital gains treatment whether or not the
Buyer is a company owned or owned by a child or grandchild
independent third party if certain conditions are met.
Background – Section 84.1, Excess Stripping and
Generation change
For the purposes of the following discussion, it is assumed that
All natural and legal persons described are domiciled in
Canada.
In principle, a taxpayer can sell shares in a trading company
the capital assets of the taxpayer are under normal market conditions
Third parties and have the capital gain taxed as capital gain
Tax rates. 2
Section 84.1 of the Act is an anti-circumvention rule. It is
designed to prevent corporate surpluses that would be taxed with
Dividend tax rates3 if this surplus were distributed to
a taxpayer as a dividend, from converting it into a capital gain
taxed at (lower) capital gains tax rates. Section 84.1 applies
when a person sells shares in a Canadian company to
another entity associated with the person.
It has been known for many years to combat prevention
Rule in Section 84.1 creates a real barrier to succession
Family business from one generation to the next. Specifically,
when one parent holds shares in a family business company. sold
the body of your child, what would that of the parents have been?
The capital gain is converted into a dividend and with. taxed
the higher dividend tax rates. When a parent sells them
Shares directly in their child and uses their lifelong capital
Profit deduction4 to secure the profit from the tax, and the
The child later sells the shares to an affiliate, the child
would experience the same dividend tax treatment to the extent that the
protected profit of parents. Thus, the rule effectively punishes
Families in which a child is a corporation to finance the
to act effectively. And that is also the case when the
Kind pays the full market value for the shares. That contrasts
with the tax treatment the parent would receive in the event of a sale
the same shares to an independent third party. Indeed
Section 84.1 makes it more tax efficient for parents who
Business to others and not to their children.
The Treasury Department has long recognized the problem
requires a solution. But the difficulty was always finding
a balance between the relief of "real"
Generation transfers and inappropriate tax avoidance. The
The Ministry of Finance has consultations with the
Corporate and tax advisory community to find options for
to solve this balancing of interests. Have these discussions
Attempts involved to define and describe the "trademarks"
real intergenerational transfers. You also thought about it
possible solutions that follow the "Quebec Approach" or
the "US approach" to the same issues.5
Background – Section 55, Capital Gains Deduction and Related
Party transactions
Section 55 of the Act is another anti-circumvention rule. It is
designed to prevent paying excessive dividends since
tax-free group dividends from one company to another
Group. This can lead to the transformation of what would otherwise be
a taxable capital gain from the sale of the payer's shares
Convert corporation into a tax-free group dividend. Subsection
55 (2) can serve to convert an excessive tax-exempt group company
Dividend into a taxable capital gain in the hands of the company
Recipient of dividends. It is a legally binding provision. It applies when you
the purposes of (or, in the case of an accepted dividend, arising from
a redemption of units of any of the results of the) payment or
The receipt of the dividend is intended to significantly reduce the
Part of the capital gain that would have been without the dividend
in the event of a sale at the market value of any stake in realized
the paying body immediately before the dividend. It will also
apply if this results in a significant reduction in
Market value of a share or a significant increase in the
Cost of all real estate of the dividend recipient. The commission
does not apply to any part of a dividend that is paid out
the "secure income" of the paying entity with the
Date of dividend.
Without prejudice to the specific nonsense, Section 55 (2) is
is intended to appeal, it has wide application. It can apply to many
Recovery transactions aimed at reaching the family
Purposes of corporate succession and which are not tax avoidance
Schemes.
There are specific carve-outs when re-characterizing in
Paragraph 55 Paragraph 2. The first exception applies to reorganizations
from affiliated companies. The second applies to all businesses
Restructuring when the very specific conditions of exception
Be hit. The first exception is generally available to make it easier
the reorganization of family business structures. But tax policy
assumes that siblings are separate and independent economic
Interests. To prevent what is perceived as inappropriate,
Application of the exception for related persons, brothers and sisters are z
the purposes of section 55, which are deemed to have been negotiated with one another
Arm length and must not be related to each other. This can be a
significant restrictions in the reorganization of family businesses (such as
for example, where siblings want to separate their interests
in a family business in separate corporations). And it can
sometimes lead to illogical results. For example for divisive
Restructuring with parents and children can be the children
Meet the Connected Person requirement because they are related
by parents. But when that parent dies, the bond is lost
and what else would be an acceptable rearrangement between
Siblings are no longer acceptable.
Invoice C-208
The bill amends both Section 55 and Section 84.1. Key to both
Changes is that they only apply in situations where a
"Qualified Share in Small Business" 6
or a "share in the capital stock of a family business or fishery"
Company. "7
The specific changes to the law when the bill is passed
C-208 are as follows:
- Subparagraph 55 (5) (e) (i) of the Act (which was issued before
Change, adopted siblings to deal with each other under arms
Length and not related) is changed to be
no longer applies to siblings who received the dividend in question
as part of a transaction or event or series of
Transactions or events of a corporation in which
the share capital is a qualified small business owner share
or a share in the capital stock of a family business or fishery
Corporation within the meaning of Paragraph 110.6 Paragraph 1 - Subsection 84.1 (2) is amended by adding a new paragraph (e).
Now when shares are sold by a parent company to a buyer
Corporation, the parent company and the buyer company are deemed to be
Transactions on customary market conditions and are therefore not subject to
Anti-circumvention rule in Section 84.1 if the following additional
Conditions are met:- the stocks in question are qualified small businesses
Shares or a share of the share capital of a family business or fishery
Group; - the buying company is controlled by one or more
Children or grandchildren of parents who are 18 years old
Age or older; and - the buying company does not have the
are subject to shares within 60 months of their purchase
- the stocks in question are qualified small businesses
- A new provision which is subsection 84.1 (2.3) is added. These
Subsection has three components:- First, it creates rules for dealing with situations in which
unlike death, the buying company acquires
actually within 60 months of the
Purchase; - Second, it reduces parents' access to their lifelong capital
Deduction of profits if the taxable capital of the corporation is used
in Canada exceeds $ 10 million and completely eliminates that
Parental access to the deduction when society
Taxable capital employed in Canada exceeds $ 15 million. These
Restriction limits the relief at very high
capital-intensive small businesses; - Third, it makes a very unusual and unique requirement that
The taxpayer concerned must inform the Minister (through them
Agent, Canada Revenue Agency) with an independent rating from
the fair market value of the relevant shares and a
affidavit signed by the taxpayer and a third party
the sale of the shares.
- First, it creates rules for dealing with situations in which
Analysis and implications
Bill C-208 deals with what has long been known as the
Injustices in the law related to intergenerational transfers
from small businesses, family businesses and family businesses
Fishing groups. The changes in Section 84.1 are designed in this way
to overcome the perceived injustice caused by a seller of the stocks
such transactions to customary third parties receive more
more favorable tax treatment than if she were to sell them
Shares in the next generation of the family. The changes in the
55 Expansion of the scope of reorganization transactions with related companies and persons to
such restructuring is tax-effective as part of a
extended family unit. In this respect, the adoption is this
Legislation should be seen as good news by the owners of the data subjects
Companies.
However, it will soon be seen that it is significant
technical complexity and shortcomings in the new provisions that
may very well require corrections through further legislative measures
Changes. One can only speculate about whether and when there might be
such an answer and whether it could have retroactive effect.
For this reason, taxpayers and advisors should proceed with caution
propose or complete the new transactions with confidence
Regulations in the form in which they were issued. Until there is more clarity
available, be it in the form of legislative changes, technical
Interpretations or judicial decisions can occur to taxpayers
into an area of uncertain tax treatment and outcomes.
A number of concerns about the new regulations have already been raised
raised. These include the following, although further studies of the
Provisions can lead to others:
- Treasury officials have long approached the potential
Changes to these sections of the Act with concern to
Balancing and differentiating between legitimate generations
Wire transfers and inappropriate tax avoidance. Because these regulations
did not come from the Treasury, but were in the
Form of a private membership bill, which appears a careful consideration
has not been fully addressed, raising concerns that
"Loopholes" will now exist to enable wealthy Canadians to
Wrongly avoiding taxes; - The "hallmarks" of the legitimate intergenerational
Transfers are absent from these regulations. In particular there is
nothing that requires the parent company to cease control of the company,
nor to require that the child have any stake in the business.
In addition, it is possible that the parent company sells the shares to
your child's holding company could then buy
the child's shares in this holding company resulting from the
Child without interest in business; - There is a requirement that the buying company does not sell
the relevant shares within 60 months of their purchase. There is no
Condition that the shares of the acquiring company are owned by
the children or grandchildren will not be sold during the 60-month holding period
Period; - There will be significant problems with CRA's ability to
monitor and enforce the provisions of new Paragraph 84.1 (2.3) (a) if
Stocks are sold within 60 months of their purchase if the current one
the normal 3-year revaluation period remains in place; - It seems that the ban on disposing of the
are subject to shares of the buying company during the following 60
One month period applies to the child (or grandchild)
Buying company also vis-à-vis an otherwise lawful
internal reorganization; - The new rules only allow the transfer between generations
"Children and Grandchildren". The expanded definition of
"Child" in subsection 252 (1) includes a child of the
Spouse or domestic partner of the taxpayer (i.e. stepchildren)
and the spouse or partner of a child of the taxpayer
(i.e. sons-in-law, daughters-in-law). It remains to be seen whether
that's too broad or too restrictive. For example not
include the taxpayer's niece or nephew who may be interested
Purchase of the family business; - The constraint that the buying company must be
controlled by one or more children or grandchildren of the taxpayer
who are 18 years or older means the buyer
Business cannot benefit from a trust. to be controlled
these children or grandchildren; - The new paragraph 84.1 (2) (e) applies if the shares
are transferred qualifying shares of small businesses or
Shares in the share capital of a family business or fishing company
within the meaning of Paragraph 110.6 Paragraph 1 Such shares are also
Shares in which the holders can typically use their term
Capital gain deduction
("LCGD") 8. The intention
appears to be that the LCGD can be used in relation to a sale
this would otherwise be subject to Section 84.1. But because of
new subsection 84.1 (2.3), access to the LCGD is reduced by
Companies with taxable capital greater than $ 10 million and is
completely eliminated when taxable capital exceeds $ 15 million. To the
Shareholders of corporations with taxable capital greater than
$ 15 million even though the LCGD would not be available
selling shareholder is structuring a
Selling shares to a child-controlled corporation or
Grandchildren so that Paragraph 84.1 (2) (e) applies and a capital
Profit arises rather than an accepted dividend; - There are concerns that the formula in the new version
Paragraph 84.1 (2.3) (b) does not achieve the intended purpose of
Decrease in the parent's available LCGD on a linear basis
for the tax years in which the taxable capital in employed
Canada of the company (or an affiliated group of companies)
is more than $ 10 million; - The new rules limit the amount of
available parent LCGD that can be claimed under subsection
110.6 (2) – in relation to qualified agricultural or fishing property and
Subsection 110.6 (2.1) – in relation to qualified small businesses
Company shares. You have no influence on the additional, or
"Charge", deduction possible under sub-item
110.6 (2.2). This increase applies to sales of
qualified farm or fishery ownership and increases the total
Deduction available for such properties at $ 1 million
(from $ 892,218, indexed through 2021, otherwise available). Although
This creates an anomaly that is no longer relevant for years
after the indexing of the limit in accordance with paragraphs 110.6 paragraph 2 and
(2.1) increases this limit above $ 1 million; and - In cases in which the new regulations in Section 55 apply because the
Subject shares are qualifying shares of small businesses or a
Shares in the share capital of a family business or fishery
Corporation, it is now possible to have siblings that actually
separate economic interests, can participate in capital gains streaks
with impunity.
Bill C-208 is unique in that it was created privately
Member law, which seldom successfully become law in
Canada. Nevertheless, the draft law was passed by the House of Commons
with the support of all major political parties, but without
government support. Interestingly, it seems that the
Bill went through the Agriculture and Agriculture and Food Committee and
not through the finance committee. It also appears that officials
of the Treasury raised a number of concerns about the
Bill and didn't support it. That is not insignificant politically
Machinations; it may well mean the government and the
In particular, the Treasury Department can try his
Prerogative to propose future income tax laws
proposed measures to revise, amend or limit the provisions
the bill. It remains to be hoped, however, that future changes will be amendment
maintain the desired and beneficial purposes of Bill C-208; and
focus on making the tax rules concerned clearer and more workable,
fair and balanced.
Footnotes
1 Income Tax Act, R.S.C. 1985, approx
(5th Supp.), In the currently valid version (hereinafter referred to as
"plot"). Unless otherwise stated,
Legal references in this article are references to the
Plot.
2 For 2021, an Ontario resident whose income does not include
the profit exceeds $ 220,001, tax on capital gains at one
effective rate of 26.76%.
3 In 2021 for an upper-peripheral Ontario resident
Tax bracket 39.34% for eligible dividends and 47.74% for
non-creditable dividends
4 Currently $ 892,218 (2021).
5 Both the Quebecers and the US federal government have
enacted regimes that create a framework in which intergenerational
Transfers can be made tax-deductible, subject to special conditions
Criteria met. One of the common features of both regimes is
that the parent company / seller cannot be actively involved after the sale
the acquirer or the transferring company.
Hence, both regimes require actual and immediate transfer of
legal control.
6 As this term is used in subsection 110.6 paragraph 1 of
Plot.
7 For the purposes of Section 110.6 (1) (b) of
Plot.
8 When all other conditions are met.
The content of this article is intended to be general
Instructions on the subject. Expert advice should be sought
about your particular circumstances.