Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation) is a private member’s bill that proposes to put the intergenerational transfer of shares of certain qualifying corporations on a similar footing, from a tax perspective, as a transfer of those same shares to an arm’s length party. The proposed legislation also provides increased flexibility for reorganizing qualifying family businesses that involve siblings.

As of June 22, 2021, Bill C-208 has been approved by the House of Commons and the Senate and is currently awaiting Royal Assent, at which time it will become law.

This proposed legislation is welcome news for business owners looking to transfer their business to the next generation. With many business owners nearing retirement, this proposed legislation comes at a critical time for intergenerational transfers.

Update (July 5, 2021)

While Bill c-208 has received Royal Assent as of June 29, 2021, the Department of Finance has released a statement indicating that it proposes to introduce legislation to clarify that Bill c-208 would come into effect at the beginning of the next taxation year, starting on January 1, 2022. Further, it is expected that the Department of Finance will also be introducing legislation to amend and clarify certain parts of Bill c-208. Further updates will be provided when available.

Update (July 20, 2021)
 
On July 19, 2021 the Department of Finance released a statement affirming that Bill C-208 is law. The statement sought to bring clarity to the government’s intentions going forward and replaced the June 30th news release by the government on the subject. In particular, the statement clarified that the Department of Finance intends to bring forward amendments to the Income Tax Act that honour the spirit of Bill C-208 while safeguarding against any unintended consequences. The forthcoming amendments are intended to make sure that Bill C-208 facilitates genuine intergenerational transfers and that it is not used for artificial tax planning. The statement provided “surplus stripping” in which dividends are converted into capital gains to take advantage of a lower tax rate, without any genuine transfer of the business actually taking place, as an example of what the government wants to avoid. 
 
Below is an illustrative list of the issues provided in the Department of Finance’s release that amendments to Bill C-208 would address:

• 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; and
• The level of involvement of the child or grandchild in the business after the transfer.

The statement said that the Department of Finance intends to bring forward draft legislative amendments for consultation.  Once that process is completed the government will publish final legislative proposals which would be introduced in a bill and apply as of the later of either November 1, 2021, or the date of publication of the final draft legislation.
 
For those taxpayers that wish to look at utilizing Bill C-208 in its current form, prior to any possible upcoming amendments, or to discuss future planning opportunities, please reach out to your Dentons tax advisor.

Proposed Changes

Bill C-208 proposes certain amendments to section 84.1 and section 55 the Income Tax Act, Canada (the “ITA”) to facilitate intergenerational transfers of certain corporations as well as to facilitate reorganizations among family businesses that involved siblings.

Current section 84.1 is drafted such that, a sale of shares of a corporation by a parent to a corporation controlled by the parent’s child could be treated as a dividend to the parent on the sale, instead of capital gain treatment, which would also prevent the parent from accessing the capital gains exemption. This results in a much higher tax liability to the parent on the sale. However, the proposed legislation amends section 84.1 to exempt certain transactions from this punitive deemed dividend treatment and to permit access to the capital gains exemption on a sale of shares where:

(a) the shares being sold by a taxpayer are qualified small business corporation shares or shares of the capital stock of a family farm or fishing corporation within the meaning of subsection 110.6(1) of the ITA;

(b) the corporation purchasing the shares (the “Purchaser Corporation”) is controlled one or more children or grandchildren of the taxpayer who are 18 year of age or older; and

(c) the Purchaser Corporation (other than by reason of death) does not dispose of the acquired shares within 60 months of acquisition.

Under the proposed legislation, if the Purchaser Corporation disposes of the acquired shares (other than by reason of death) within 60 months of the acquisition, the above exemption from the application of 84.1 does not apply and the taxpayer is deemed to have disposed of the shares in question to the person who acquired them from the Purchaser Corporation for purposes of subsection 84.1. It is not clear whose death is being referred to in the proposed legislation.

There is also a proposed reduction on the amount of capital gains exemption available to the taxpayer transferring these shares if the taxable capital employed in Canada of the corporation (and any associated corporations) in question exceeds $10 million and fully eliminates access to the capital gains exemption where taxable capital employed in Canada reaches $15 million. This provision does limit the benefit of Bill C-208 for those businesses that have larger amounts of taxable capital. It is not clear, as currently worded, whether this reduction is actually effective. However, there is sill a benefit for those business owners as they can avoid the negative dividend treatment as long as the shares qualify under the proposed legislation.

Further, there is a proposed requirement that the taxpayer who transfers the shares in question provide to the Canada Revenue Agency an independent assessment of the fair market value of the shares being transferred along with an affidavit signed by the taxpayer and by a third party attesting to the disposal of the shares. There is no clarity provided on what form the affidavit would take and what would be acceptable to the Canada Revenue Agency as an “independent” assessment of value.

Section 55 of the ITA currently provides rules that recharacterize what would otherwise be tax-free intercorporate dividends as taxable capital gains. There are exceptions to this, however, one of which is when the parties involved are “related”. Section 55 of the ITA currently provides that siblings are not related for purposes of that section. This means that the rules for reorganizing a corporation involving siblings are more complicated and restrictive than if they were considered to be related.

Bill C-208 proposes to amend subparagraph 55(5)(e)(i) of the ITA to deem siblings to be related for purposes of section 55 of the ITA in situations where the dividend in question was received or paid, as part of a transaction, by a corporation of which a share of the capital stock is a qualified small business corporation or a share of the capital stock of a family farm or fishing corporation within the meaning of subsection 110.6(1) of the ITA. The effect is to facilitate a reorganization of a business between family members involving siblings in a much simpler and less costly manner.

What this means to you

If Bill C-208 is implemented in its current form, there will be more tax effective ways for you to transfer your shares of a qualified small business, qualified farm or fishing corporation to the next generation than currently exist. It should simplify the reorganization of family businesses where siblings are involved at the shareholder level. Further, there will be more tax friendly options for succession and estate planning for family businesses. All of this should encourage family business to stay in the hands of family members’ long term and reduce the incentive to transfer family businesses to arm’s length parties.

The tax team at Dentons will be monitoring Bill C-208 closely and will keep you updated on its progress. In the meantime, if you are considering a transfer of your business to family members, or are contemplating a division or reorganization of your family business, please contact us to discuss the options available to you and their tax implications.