Bill C-208: The saga continues...


On June 29, 2021, the Private Member’s Bill C-208, regarding the transfer of small businesses and family farm or fishing corporations (the Bill), received Royal Assent. The Bill limits the application of section 84.1 on inter-generational business sales. Avoiding section 84.1 allows the vendor to receive capital gains treatment on a non-arm’s length disposition of shares and potentially use the lifetime capital gains exemption (LCGE) to shelter any gain from tax. 

On June 30, 2021, the Department of Finance issued a statement that it intended to make amendments to clarify the current legislation and to amend the effective date to Jan. 1, 2022 rather than the date of Royal Assent. 

The June 30 announcement caused much confusion due to concerns that the amendments would retroactively change the legislation, leaving taxpayers in a state of uncertainty until any changes become effective. In response to this stakeholder feedback, on July 19, 2021, Finance Minister Chrystia Freeland issued a news release confirming that the Bill was in fact law as of the date of Royal Assent. 

The release also addresses what Finance believes to be drafting deficiencies in the legislation that may provide opportunities for ‘surplus stripping’ – tax planning to remove funds from a corporation as a capital gain rather than as a dividend because the latter is subject to higher tax rates and not eligible for LCGE in the hands of an individual. 

The Department of Finance specified that it will introduce prospective legislative amendments by way of a new bill. The amendments are intended to support genuine business transitions but include limitations and parameters to address the following: 

  • The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild;
  • Setting out the level of ownership that the parent can maintain in the corporation for a reasonable time after the transfer;
  • The requirements and timelines for the parent to transition their involvement in the business to the next generation; and
  • Determining the appropriate level of involvement of the child or grandchild in the business after the transfer.

The Department of Finance plans to publish final legislative proposals once feedback has been gathered and considered. The government has advised that the amendments would be effective the later of Nov. 1, 2021, and the date of publication of the final draft legislation.

The July 19 clarification provides comfort to taxpayers considering legitimate family business transitions to adult children or grandchildren. The Department of Finance has stated its intention to preserve the spirit of current legislation and support bona fide intergenerational transfers. Therefore, taxpayers should be cautious of transactions undertaken solely to avoid tax, which could be subject to Canada Revenue Agency audits in the future.        


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Maria Severino

National Tax Leader

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