A New Bill Facilitates Intergenerational Transfers of Small Businesses and Farms

Effective tax planning is critical when an owner-manager is ready to sell her business. Advisors are often consulted as part of succession planning to help structure the sale of small business shares in the most tax-efficient manner possible. However, the sale of a business to family members has historically posed particular challenges as there were tax advantages in selling shares to arm’s-length parties that were not available when selling shares to non-arm’s length parties. This resulted in an unfair disadvantage to those who wished to transfer their family business to their younger generations. The recent passing of Bill C-208 helps level the playing field in respect of the sale of certain businesses to non-arm’s length parties.

The Playing Field

When an owner-manager sells shares of her small business to a corporation owned by an arm’s length party, she can take advantage of her lifetime capital gains exemption to shelter tax on the resulting capital gain. As well, when the arm’s length purchaser buys the shares through a corporation rather than personally, she can use low after-tax corporate funds (for example, Canadian controlled private corporations (CCPCs) are subject to a tax rate of 12.2% on the first $500,000 of taxable income in Ontario) to pay the vendor rather than funds that have been taxed personally in the hands of the purchaser at potentially significantly higher tax rates (The highest tax rate on employment income in Ontario is a combined rate of 53.53%!).

This is in contrast to when an owner-manager sells shares of her small business to a corporation owned by her child or grandchild, in which case, Section 84.1 (an anti-avoidance provision) of the Income Tax Act recharacterizes the resulting capital gain as dividend income. Dividend income is taxed at higher tax rates than capital gains and furthermore cannot be applied against the lifetime capital gains exemption to shelter tax. Consequently, owner-managers who wished to keep the business in the family ended up paying more tax and having lower funds available for retirement. Alternatively, if the child or grandchild used personal funds (instead of corporate funds) to buy the shares, she would be disadvantaged by those funds having already been subject to higher tax rates.

Therefore, Section 84.1 precluded both the owner-manager (vendor) and the child or grandchild (purchaser) from reaping optimal tax benefits (i.e. capital gains treatment for vendor and use of corporation to buy shares for purchaser).

The Leveling

Bill C-208 amends Section 84.1 to allow for the resulting capital gain on sale of shares to a corporation owned by the owner-manager’s child or grandchild to remain characterized as a capital gain (affording the more advantageous tax treatment), where all of the following conditions are met:

  • the transferred shares are of “qualified small business corporation shares” or “shares of the capital stock of a family farm or fishing corporation” (“Qualifying Shares”);
  • the shares are transferred to a purchaser corporation that is controlled by one or more of the owner-manager’s children or grandchildren who are 18 years of age or older; and
  • the purchaser corporation does not dispose of the transferred shares within 60 months of acquiring them, with some exceptions.

As a result, now both the owner-manager and the child or grandchild can reap optimal tax benefits (i.e. capital gains treatment for vendor and use of corporation to buy shares for purchaser).

An independent assessment of the fair market value of the shares is required in order to benefit from this new provision. Further details regarding what constitutes an acceptable independent assessment are not yet available. As well, access to the lifetime capital gains exemption is reduced where the corporation has taxable capital employed in Canada in excess of $10 million, and gradually eliminated where such taxable capital reaches $15 million.

Restructure of a Family Business Between Siblings

Bill C-208 also amends section 55 (another anti-avoidance rule) to facilitate tax-deferred reorganizations of family-owned businesses and farms which involve sibling ownership. Section 55 recharacterizes an otherwise tax-free intercorporate dividend into a taxable capital gain, but allows for an exception to this recharacterization for related parties. However, siblings were not considered related parties for this exception. The Bill amends this to now consider siblings related for purposes of this rule. This amendment should help reduce the complexities faced in the past in relation to the division of family businesses between siblings.


For tax planning assistance with transfer or restructure of a family business, farm, or fishing corporation, contact our tax team. We are here to help.

July 5, 2021 update: On June 30, the day after Bill C-208 received Royal Assent, the Department of Finance issued a news release clarifying the effective date of Bill C-208: Bill C-208 makes amendments to the Income Tax Act but does not include an application date. The federal government is committed to facilitating genuine intergenerational share transfers, while preventing tax avoidance that undermines the equity of Canada’s tax system. The government proposes to introduce legislation to clarify that these amendments would apply at the beginning of the next taxation year, starting on January 1, 2022.


This article has been written in general terms to provide broad guidance only. It should not be relied upon to cover specific situations and you should not act upon the information contained herein without obtaining specific professional advice.  Please contact our office to discuss this information in the context of your specific circumstances. We accept no responsibility for any loss or damage resulting from your reliance on the information in this article.



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