Tax Alert: Bill C-208 approved

Traditionally legislative changes in Bill C-208 are effective on the date of Royal Assent, or June 29, 2021. The following day the Department of Finance announced that it proposes to introduce legislation to clarify that the Bill C-208 legislation would apply at the beginning of the next taxation year, effective on January 1, 2022. MNP will continue to provide updates as more information becomes available.

The Bill allows the intergenerational transfer of certain family businesses to receive the same tax treatment as businesses sold to a third party. Previously, a long-standing anti-avoidance rule in the Income Tax Act (ITA) treated intergenerational transfers of a business as a dividend rather than a capital gain. Bill C-208 changes that rule to allow access to the lifetime capital gains exemption. Bill C-208 also provides for positive changes around the division of a family business amongst siblings.

Transfer of family business to the next generation

Bill C-208 provides for amendments to the ITA that will facilitate certain intergenerational transfers if the following conditions are met:

• The parent’s shares being transferred are shares of a Qualified Small Business Corporation (QSBC), a family farm or a fishing corporation;
• The corporation purchasing the shares is controlled by either the parent’s children or grandchildren, who are at least 18 years of age; and,
• The purchasing corporation does not dispose of the shares within 60 months of acquiring them (for a reason other than death).

The passing of this Bill will be welcomed news as succession has been a long-standing issue. There are, however, several carve outs and other limitations which may preclude access to these new rules. For example, embedded in Bill C-208 is a provision that reduces access to the capital gains exemption if the taxable capital employed in Canada exceeds $10 million and fully eliminates access where taxable capital is $15 million or more. This will limit capital-intensive family businesses that would otherwise enjoy the benefits from this change in legislation.

Further, the taxpayer must provide the Canada Revenue Agency 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. Details have not yet been released as to what will qualify as an independent assessment and what form the attestation would look like.

Restructure of a family business involving siblings

Currently, there is a rule in the ITA that, in certain circumstances, effectively converts what would otherwise be a tax-free intercorporate dividend into a taxable capital gain. Certain related party transactions are excluded from this recharacterization; however, siblings are considered not to be related under this provision. This can result in complex and costly transactions where a division of a business takes place among siblings.

Bill C-208 removes the carve-out of siblings and consistent with the rest of the ITA, treats siblings as related parties for this specific provision. This change will allow for a less complicated division of a family business between brothers and sisters.

What this means for you and your business

Bill C-208 represents good first steps to support family business succession. Businesses contemplating an intergenerational transfer, either now or in the future, should reach out to their MNP Advisor.

MNP has continuously advocated for changes relating to the various intergenerational transfer issues by looking through the lens of our clients. We are proud to be a constant voice at the table with Parliamentarians. MNP will continue to work with government to better understand how the amendments will be implemented and to ensure areas of uncertainty are reviewed.