Bill C-208 was granted Royal Assent on Tuesday, June 29, 2021. It amended Sections 55 and 84.1 of the Income Tax Act (ITA) to provide tax relief to intergenerational share transfers of small businesses or family farm and fishing corporations.
Previously, parents selling shares to an arm’s length (unrelated) corporation were able to use the capital gains exemption to reduce the income tax on the resulting capital gain on the transaction. However, if the shares were sold to a non-arm’s length (related) corporation, such as a corporation owned by the parent’s children, for cash or a promissory note, the parents would not have a capital gain and could not use the capital gains exemption. This resulted in an unfair tax treatment of intergenerational share transfers between related or non-related parties.
The new rules attempt to level the playing field by allowing the sale of the parents’ shares to a corporation owned by the children or grandchildren. The resulting gain can be sheltered by the lifetime capital gains exemption to reduce the income tax owing by the parents.
There are several new requirements in the amendments that must be met. The first requirement is that the purchaser corporation be controlled by one or more children or grandchildren, aged 18 or older, of the vendor and the purchaser corporation does not dispose of the purchased shares within 60 months of the purchase. Additional requirements are that an independent assessment of the fair market value of the shares must be provided to the Canada Revenue Agency, together with an affidavit signed by the vendor and a third party attesting to the disposal of the shares.
To ensure the tax relief only applies to small businesses, the new rules include a provision that eliminates the parent’s ability to claim the lifetime capital gains exemption on the sale of shares if the company being sold has taxable capital employed in Canada exceeding $10 million, calculated on an associated group basis (with the ability to claim the capital gains exemption being eliminated once taxable capital exceeds $15 million).
The other significant change was in Section 55 of the ITA that prevents the conversion of what would be a taxable capital gain into a tax-free intercorporate dividend. Relief is now allowed for certain corporate reorganizations that assist in the transition of business or family farm or fishing assets between family members. This relief was not previously allowed for transactions that involved siblings as they were deemed not to be related for purpose of these rules.
New ITA 55(5)(e)(i) now deems siblings to be related for purposes of these rules. This should allow certain corporate reorganizations involving shareholders who are siblings to be accomplished more easily.
Bill C-208 was made law on June 29, 2021. The very next day, the Department of Finance issued a news release to announce its intention to delay the effective date of these amendments to Jan.1, 2022 due to concerns with the language of the bill.
The Department of Finance then issued a press release on July 23, 2021, confirming that the provisions of Bill C-208 can be used immediately to facilitate intergenerational transfers of shares of small businesses or family farm and fishing corporations.
The government appears particularly concerned about any loopholes that create the opportunity to effectively convert dividends into capital gains (which have a lower personal tax rate) without a genuine transfer of ownership occurring (i.e., surplus stripping).
Finance will bring forward amendments for consultation. Once completed, the amendments would apply either November 1, 2021, or the date of the publication of the final draft legislation–whichever comes later.
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A McCay Duff LLP tax professional would be more than happy to help you navigate these new rules if you feel they apply to your family situation.
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