Tax Insights: Intergenerational business transfers – Consultation and Canada Revenue Agency guidance

Issue 2022-20

In brief

On April 7, 2022, the federal government’s 2022 budget announced a consultation on the income tax rules outlined in Bill C-208¹ relating to intergenerational transfers of small businesses, family farms and fishing corporations. The budget did not propose any specific measures to address the government’s concerns that the amendments in Bill C-208 might unintentionally allow surplus stripping without a genuine intergenerational business transfer. 

In addition, the Canada Revenue Agency (CRA) recently published a web page, “Affidavits and valuations for the transfer of a small business, family farm or fishing corporation (Bill C-208),” which provides its interpretation of the requirements in Bill C-208,² for providing the Minister with: 

• an independent assessment of the fair market value (FMV) of the transferred shares 
• an affidavit signed by the taxpayer and a third party attesting to the disposal of the shares

This Tax Insights provides an overview of these recent announcements.

In detail

Background

Bill C-208, which came into effect on June 29, 2021 (the day it received royal assent), is a private member’s bill that amended the Income Tax Act (Canada) (ITA) in an attempt to alleviate the financial disadvantage that typically arose for taxpayers who sold their business, family farm or fishing corporation to their children or grandchildren, as compared to selling to an arm’s length third party. This disadvantage was caused by certain tax rules, specifically an anti-avoidance rule in section 84.1 of the ITA. When Bill C-208 was enacted, the Department of Finance noted that the language used in the legislation does not appear to work as intended and raised concerns that would likely need to be addressed by the government through further amendments to the legislation. The Minister of Finance later affirmed that the federal government intends to propose legislative amendments that “honour the spirit of Bill C-208” to ensure that the law facilitates genuine intergenerational share transfers, but also “safeguard[s] against any unintended tax avoidance loopholes that may have been created by Bill C-208.” At the date of publication, no legislative amendments have been released relating to Bill C-208. 

For more information on Bill C-208 and the key concerns and issues that the Department of Finance will need to address to ensure that the legislation’s intended outcomes are achieved, see our Tax Insights “Tax relief for intergenerational transfers of small businesses and family farms: But how will the new rules work?” (July 22, 2021 update).

2022 federal budget – Consultation

The 2022 federal budget did not propose any specific measures to address the Department of Finance’s concerns relating to Bill C-208. Instead, it announced a consultation process to determine “how the existing rules could be modified to protect the integrity of the tax system while continuing to facilitate genuine intergenerational business transfers” and stated that the government is “committed to bringing forward legislation, as necessary to address this specific issue, which could be included in a bill to be tabled in the fall after the conclusion of the consultation process.” Comments must be submitted to the Department of Finance by June 17, 2022.

Canada Revenue Agency – Valuations and affidavits

Bill C-208 altered the tax treatment of certain transfers of shares:

• in a qualified small business corporation (QSBC), and 
• of the capital stock of a family farm or fishing corporation,

so that when an individual transfers these shares to a corporation controlled by one or more of their children or grandchildren, the transfer is taxed the same as an arm’s length sale.

The new rules require the individual who transfers the shares to provide the CRA with:

• an independent assessment of the FMV of the transferred shares
• an affidavit signed by the individual and a third party attesting to the disposal of the shares

The rules do not, however, provide any due date for the provision of this information nor any specific consequences for failure to provide the information.

In April 2022, the CRA posted information on its website³ providing its interpretation of these two requirements.

Requirements for an independent assessment of FMV

The CRA states that an independent assessment of FMV represents a valuation of the shares that must be completed by someone who:

• is unrelated to the corporation or vendor and does not have any financial interest in the transactions, and
• has sufficient knowledge and experience in valuation and the industry being dealt with

The specific contents of the valuation report will depend on the nature of the corporation, its location and its operations, and the CRA suggests this will typically include:

• calculations of value (including an explanation of the calculations and the methodology rationale)
• analysis of the business, industry, location and economy to assess risk
• appraisals of farm equipment and livestock, and of real property
• analysis of the rights and restrictions of the corporation shares and other agreements (e.g. shareholder agreements)
• description of the assumptions made to complete the analysis

The CRA states that a report that meets the Chartered Business Valuation Institute’s standards will meet its expectations, but that a Chartered Business Valuator is not required to complete the valuation.

Requirements for the affidavit

The legislation does not specify what information should be sworn in the affidavit in connection with the disposal of the shares. In the CRA’s view, the affidavit must include:

• name, address and social insurance number (SIN) of the individual who is disposing of the shares
• name and business number (BN) of both the entity whose shares were disposed and of the purchaser corporation
• date the shares were disposed (sold to the purchaser corporation)
• an attestation that:
  • the disposed shares are QSBC shares, or shares of a family farm or a fishing corporation
  • the individual’s children or grandchildren control the purchaser corporation and are at least 18 years of age
• the names and SINs of the children or grandchildren who control the purchaser corporation
• signature of a commissioner of oaths or notary public and the individual who is disposing of the shares

The CRA does not provide a specific form, but does provide a sample affidavit on its web page. A taxpayer who uses the sample affidavit as a guide should be careful to ensure that the wording of the affidavit indicates that the statements regarding the status of the shares and the control of the purchaser corporation are as at the date of the disposition.

The takeaway

Modifications to these rules by the Department of Finance could potentially limit access to the beneficial tax treatment currently provided, to the extent more stringent requirements to qualify are introduced. Interested parties should submit their comments to the Department of Finance (intergenerational-transfers-transferts-intergenerationnels@fin.gc.ca) by June 17, 2022. 

Taxpayers affected by Bill C-208 should consult with their PwC adviser to discuss what actions should be considered before legislative amendments are released that could implement more restrictive rules. The Department of Finance has previously indicated that any draft legislative amendments resulting from the consultation process would not be made applicable prior to the publication date of the final draft legislation.

<sup>1. Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation) [S.C. 2021, c. 21] received royal assent on June 29, 2021.
2. New paragraph 84.1(2.3)(c) of the Income Tax Act.
3. CRA web page “Affidavits and valuations for the transfer of a small business, family farm or fishing corporation (Bill C-208)” (April 2022).</sup>