What is Bill C-208?
On June 29th, the Governor General granted Royal Assent to Bill C-208. The Department of Finance confirmed that the provisions of Bill C-208 will be effective immediately. Upcoming amendments will cover “loopholes” in the legislation. These will become effective on November 1, 2021, or on the date of the publication of the draft legislation.
Bill C-208 will help facilitate intergenerational transfers of shares of small business corporations, family farms or fishing corporations to corporations owned by children or grandchildren, so parents can make better use of their lifetime capital gains exemption.
In effect, the legislation makes amendments to Section 84.1 of the Income Tax Act and allows a corporation owned by the parent’s children or grandchildren (a related corporation) to achieve the same tax result as if they were to sell their business to a 3rd party (unrelated corporation).
How did intergenerational transfers used to work, and how does Bill C-208 change things?
Before Bill C-208, selling shares to the related corporation meant negative tax consequences, as the capital gain from the sale were considered a deemed dividend. The new rules attempt to level the playing field. It will allow a sale to non-arm’s length (related) purchaser of the shares. That will result in a capital gain and the ability to use all of a portion of the lifetime capital gains exemption to reduce the income tax.
The main requirements for a genuine intergenerational transfer include:
- One or more children or grandchildren of the vendor control the purchaser corporation;
- Purchaser corporation does not dispose of the purchased shares within 60 months of purchase; and
- An independent assessment of the fair market value of the shares must be provided to Canada Revenue Agency together with an affidavit signed by the vendor and a 3rd party attesting to the disposal of the shares.
The bill is an exciting development. In essence, It will assist in the ease of intergeneration business ownership to family members. Further, it will still reward the contribution of small business owners to the Canadian economy.