Tax Insights: Tax relief for intergenerational transfers of small businesses and family farms: But how will the new rules work?

July 22, 2021

Issue 2021-15R

July 22, 2021 update:
On July 19, 2021, Deputy Prime Minister and Minister of Finance, Chrystia Freeland affirmed that private member’s Bill C-208 (see below), which had received royal assent on June 29, 2021, is law and is now in effect.* However, the federal government “does intend to bring forward amendments to the Income Tax Act 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.” The amendments will address certain issues, including:

  • the requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild, and the level of ownership in the corporation 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 that generation’s level of involvement after the transfer

The draft legislative amendments will be subject to consultation, and the final amendments will be introduced in a parliamentary bill that will apply the later of:

  • November 1, 2021
  • the date of publication of the final draft legislation

Taxpayers affected by Bill C-208 should consult their PwC adviser to discuss what actions should be considered before November 1, 2021, as more restrictive rules could apply after this date.

The remainder of this Tax Insights was published on June 23, 2021. It has not been altered to reflect the Minister of Finance’s announcement.

* This July 19, 2021 announcement replaces the Department of Finance’s June 30, 2021 news release, which had stated that the federal government was proposing to introduce legislation to clarify that the amendments in Bill C-208 “would apply at the beginning of the next taxation year, starting on January 1, 2022.” This January 1, 2022 date is no longer relevant.


In brief

On June 22, 2021, Bill C-208, An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation), passed third reading in the Senate and is expected to receive royal assent shortly. 

Bill C-208 is a private member’s bill that amends the Income Tax Act (Canada) (ITA) in an attempt to alleviate the financial disadvantage that typically arises for taxpayers who sell 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 is caused by certain tax rules, specifically an anti-avoidance rule in section 84.1 of the ITA. Despite Bill C-208’s best efforts to “fix” this problem, the language used in the legislation does not appear to work as intended and raises many concerns that will likely need to be addressed by the government through further amendments to the legislation. 

This Tax Insights highlights the current rules in the ITA, the ITA amendments in 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. 

In detail


The ITA currently contains rules that can make it more financially advantageous for a taxpayer to sell shares of their business, family farm or fishing corporation to a third party, instead of to their children or grandchildren. This is the case if the shares:

  • are shares of a family farm or fishing corporation (that meet a specific definition), or 

  • meet the definition of qualified small business corporation (QSBC) shares 

The sale of QSBC shares or family farm or fishing corporation shares by an individual is generally eligible for the lifetime capital gains exemption (LCGE), which is currently $892,218 (indexed after 2021) for QSBC shares and $1 million for family farm or fishing corporation shares. However, anti-avoidance rules contained in section 84.1, among other rules, can:

  • prevent an individual from claiming their LCGE when they sell to a corporation controlled by family members, or

  • increase the after-tax cost to family members of funding the acquisition of the shares when the individual does claim the LCGE 

Section 84.1 attempts to limit so-called “surplus stripping,” the extraction of property from a corporation on a tax-free basis through non-arm’s length sales or transfers, by treating what would otherwise be a capital gain on a sale of shares to a purchaser corporation as a dividend (and where the owner, or a former owner, of the shares claimed the LCGE on a previous disposition, the cost of the shares for purposes of section 84.1 is reduced by the amount of that LCGE claim, so that multiple step transfers cannot avoid the deemed dividend). As a result, a sale of QSBC shares or family farm or fishing corporation shares to a related party where the LCGE is otherwise available (or had previously been claimed) can result in less favourable tax treatment than a sale to an arm’s length party. 

The legislation in Bill C-208 is intended to limit the application of section 84.1 in the case of certain intergenerational transfers of shares, to address the perceived unfairness of the current rules. The bill also modifies the application of section 55 to facilitate certain other corporate restructurings involving businesses owned by siblings. 

The Income Tax Act amendments

Bill C-208 amends paragraph 55(5)(e) and section 84.1 of the ITA. These amendments apply upon receiving royal assent.  

Paragraph 55(5)(e) amendment

Current paragraph 55(5)(e) deems siblings to not be related for purposes of subsection 55(2). In general terms, subsection 55(2) is an anti-avoidance rule intended to prevent the conversion of an amount that would normally be a taxable capital gain into a tax-free intercorporate dividend.  

Amended paragraph 55(5)(e) will provide an exception to this deeming rule, so that siblings will be related for purposes of subsection 55(2) “where the dividend was received or paid, as part of a transaction or event or a series of transactions or events, by a corporation of which a share of the capital stock is a …. [QSBC] share or a share of the capital stock of a family farm or fishing corporation” as defined in subsection 110.6(1). 

This amendment means that subsection 55(2) may no longer apply to effectively prevent certain tax-deferred divisive corporate reorganizations involving owners who are siblings, if the shares of the corporations involved are QSBC shares or shares of a family farm or fishing corporation. Interestingly, the provision does not specify the particular individual or trust in respect of which the shares must be QSBC shares (or shares of a family farm or fishing corporation), having regard to the fact that shares held by a corporation cannot meet the relevant definition. Accordingly, it appears that it may be sufficient that any share of the corporation held by an individual or trust meets the definition (although it is also unclear at what precise time the definition must be met).

Section 84.1 amendments

Current subsection 84.1(1) applies when an individual or trust disposes of shares of a corporation (the subject corporation) to another corporation with which the taxpayer does not deal at arm’s length (the purchaser corporation) and immediately after the disposition the subject corporation is connected with the purchaser corporation. If subsection 84.1(1) applies:

  • the paid-up capital (PUC) of the shares of the purchaser corporation issued as consideration for the shares of the subject corporation (the exchanged shares) is limited to the greater of the PUC and the “hard tax cost” (essentially, cost less any LCGE or V-day exemptions claimed by related persons in respect of the shares) of the exchanged shares less any non-share consideration received by the taxpayer
  • the taxpayer is deemed to have received a dividend equal to the amount by which the non-share consideration exceeds the greater of the PUC and the hard tax cost of the exchanged shares

Amended section 84.1 adds paragraph 84.1(2)(e) and subsection 84.1(2.3). 

New paragraph 84.1(2)(e)

New paragraph 84.1(2)(e) will apply when:

  • the exchanged shares are QSBC shares or shares of a family farm or fishing corporation

  • the purchaser corporation is controlled by one or more children or grandchildren (aged 18 or older) of the vending taxpayer, and

  • the purchaser corporation does not dispose of the exchanged shares within 60 months of the purchase

When applicable, new paragraph 84.1(2)(e) will deem the taxpayer and the purchaser corporation to be dealing at arm’s length, so that subsection 84.1(1) should not apply to the disposition.

New subsection 84.1(2.3)

New subsection 84.1(2.3) contains rules intended to support new paragraph 84.1(2)(e). Paragraph:

  • 84.1(2.3)(a) sets out certain consequences that are to arise if the purchaser corporation disposes of the exchanged shares within 60 months of the purchase 

  • 84.1(2.3)(b) seeks to reduce the amount of the LCGE in subsections 110.6(2) or (2.1) when the subject corporation has taxable capital employed in Canada exceeding $10 million 

  • 84.1(2.3)(c) provides that “the taxpayer must provide … [the Canada Revenue Agency (CRA)] with an independent assessment of the fair market value of the subject shares and an affidavit signed by the taxpayer and by a third party attesting to the disposal of the shares”

Technical concerns with the new rules

Although it seems, based on the wording of Bill C-208 and related comments during debates in the House of Commons and the Senate, that the changes to section 84.1 were intended to apply to what might be described as “bona fide” intergenerational transfers of shares of corporations that are “small” in size (having taxable capital not in excess of between $10 million and $15 million), the actual legislation appears to allow a much broader range of transfers that avoid the adverse tax treatment under section 84.1. This is because the measures included in the legislation to prevent perceived abuse will likely be largely ineffective, as currently drafted. For example: 

  • The condition that the purchaser corporation be controlled by adult children or grandchildren of the disposing taxpayer does not require any of those children or grandchildren to have any involvement in the business carried on by the acquired corporation, nor will it be necessary for them to provide any significant investment or capital contributions to the purchaser corporation or otherwise assist in the funding of the purchase. Furthermore, although the purchaser corporation must continue to own the exchanged shares for at least 60 months, the shares could be fixed-value preferred shares (for example) on which no dividends are required to be paid, such that the purchaser corporation need not have any real ongoing investment in the acquired corporation. The parent vendor can continue to control the subject corporation and participate fully in any future growth in value of the business.

  • The paragraphs in new subsection 84.1(2.3) are said to apply for purposes of paragraph 84.1(2)(e). However, to have what appears to be their intended effect, the rules in these paragraphs would need to apply also to many other sections of the ITA. Their failure to do so makes it difficult to see how these rules could be effective.

  • Because of the inadequacy of new subsection 84.1(2.3), there is actually no limit to the “size” (i.e. level of taxable capital) of corporation to which the section 84.1 relief will apply. There is no “enforcement” mechanism to compel a taxpayer to provide a valuation of the subject corporation shares, nor any apparent consequences for the taxpayer’s failing to do so (and in any event, it is unclear what would constitute an “independent assessment” of the value and there is no guidance regarding when or how such information would be required to be provided to the CRA). 

In general, the legislation does not interact well with the existing rules and scheme of the ITA, and raises many questions and uncertainties regarding how the new rules will be applied. These and other issues and concerns will likely need to be addressed by the government to ensure that the legislation accomplishes its intended objectives. 

The takeaway

This new legislation is unlikely to accomplish Parliament’s intended objectives without further amendments, because it creates opportunities for taxpayers to "take advantage" of these relaxed rules in ways that were likely not intended. However, it is unclear how quickly any proposed amendments will be released by the government and whether they will be retroactive. Accordingly, taxpayers should be cautious in taking immediate action in reliance on the rules in Bill C-208 in situations where the related transactions might not be considered to represent a bona fide intergenerational transfer.


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