By: Lisa Asbreuk and Mike Brown
On June 29, 2021, Bill C-208 received Royal Assent and became part of Canada’s Income Tax Act (the “ITA”), despite some attempts to delay its coming into force you may have read about this summer in the news. The Bill is formally titled An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation). As its full title suggests, Bill C-208 amends sections of the ITA to allow taxpayers to transfer shares in a qualified small business corporation (“QSBC”), family farm, or fishing corporation to their children or grandchildren and potentially receive capital gains exemption tax treatment on the proceeds for such sale. The Bill also makes it easier and more financially attractive for siblings who are shareholders in these corporations to transfer shares to each other. This change to the tax rules is considered long overdue by many and a welcome relief for all family businesses wanting and intending to transfer ownership to the next generation.
Before Bill C-208: Financial Disadvantages
Prior to Bill C-208, the ITA disadvantaged parents from selling QSBC shares to their children or grandchildren because the parents could not claim the lifetime capital gains exemption on the sale transaction. By contrast they could claim this lifetime capital gains exemption treatment if they sold the QSBC shares to a third party purchaser outside the family. This was considered an odd and perverse financial disincentive from keeping family businesses in the family, and resulted in many owners feeling compelled to sell shares to an outsider, even if they wanted to keep it in the family.
Similarly, often siblings are shareholders in a family-owned business. Before Bill C-208, the ITA created financial disadvantages for siblings transferring shares to each other because they were deemed not to be related under applicable rules. As a result, the ITA rule permitting the conversion of a taxable capital gain into a tax-free intercorporate dividend did not apply to siblings.
NOW: After Bill C-208:
The new legislation, at this time, removes the financial disadvantages noted above, provided certain conditions are met.
As of the date of this article:
- Parents are now able to sell shares in QSBCs to their children or grandchildren and claim the lifetime capital gains exemption on the sale reducing overall tax liability.
- Siblings are able to transfer shares in QSBCs to a sibling and convert taxable capital gains into a tax-free intercorporate dividend, as they are now deemed to be related under the rule change.
For those wanting to keep a QSBC in the family or complete corporate reorganizations more efficiently, the major financial disadvantages to doing so have been removed, for now. That said, it remains to be seen by all family business owners and their advisors whether this is a window of opportunity and whether new rules or restrictions will limit eligibility.
Anticipated Amendments and Regulations
Although the new legislation is currently in force, the Department of Finance has announced that amendments and clarifications are coming to close what they consider to be “loopholes” and to add further rules and requirements and consequences to ineligible transfers. The Department of Finance has indicated that the amendments will address the following:
- 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
These amendments will apply starting the later of November 1, 2021 or the publication date of the final draft legislation. Stay tuned.
As always, we strongly recommend seeking tax advice from your tax advisor. Many family businesses are acting on the new legislation at this time but proceeding with caution with a view to structuring intergenerational transfers within what is currently understood to be the spirit and intent of the legislation.
If you would like to discuss the details of Bill C-208 and how it impacts your business, please do not hesitate to contact our experienced business law team together with your tax advisor. We appreciate being trusted advisors to many family businesses directly impacted by these laws.
The author would like to thank Caroline Bedard, articling student, for her assistance in preparing this blog post.