Will Bill C-208 reduce tax on inter-generational business transfers?


Often, family members that own a small business intend to grow it into a legacy for future generations. However, existing private company rules can make the taxation and succession of these businesses complicated to navigate. For example, a sale of these companies at fair market value to a related person – like children or grandchildren - is generally less advantageous from a tax perspective than a sale to an arm’s length third party due to section 84.1 of the Income Tax Act (ITA).  

Many small businesses, farms and fisheries meet the definition of ‘Qualified Small Business Corporations’ (QSBC). The sale of QSBC shares is generally eligible for up to $1,000,000 of lifetime capital gains exemption (LCGE). However, anti-avoidance rules contained in section 84.1, among others, can prevent the use of this LCGE when the sale is made to a related party. 

Very generally, section 84.1 of the ITA attempts to limit surplus stripping through non-arm’s length sales or transfers. This provision can result in the proceeds of sale being treated as a dividend rather than a capital gain. In addition to limiting access to the LCGE, dividends received by individuals are subject to a higher tax rate than a capital gain. Consequently, under the current legislation, a sale of QSBC shares to a related party can result in less favourable tax treatment than a sale to an arm’s length party.

Bill C-208 intends to limit the application of section 84.1 in the case of inter-generational transfers of businesses. The Bill would exclude QSBC shares (including farm and fishing corporations) from section 84.1 when sold to a child or grandchild and held by the purchaser for a minimum of 60 months. 

In its 2021 Budget, the Quebec government announced similar legislative changes to facilitate inter-generational transfers of business.     

These relatively small additions to the ITA could result in groundbreaking changes in how entrepreneurs, farmers and fishers transition their business to the next generation, as well as reduce the tax applicable thereon. 

Unlike most private member bills that usually do not progress past first or second reading, Bill C-208 passed third reading on May 12, 2021 and is next headed to the Senate for review. It will be interesting to see whether this private member Bill will become law. 


Subscribe to our newsletters



Contact us by phone +1.855.420.8473 or submit your questions, comments or proposal requests


Maria Severino

National Tax Leader

Recent Tax Alerts

Bill C-208: The saga continues...

Bill C-208 has received Royal Assent and is now law, but legislative amendments are expected to support only bona fide business transitions.

  • July 21, 2021

Bold new international tax reform

Shortly after the G7 agreement, 130 countries and jurisdictions agreed to work collaboratively to reform the international taxation rules.

  • July 09, 2021

Canadian resident directors no longer needed for Ontario corporations

Effective July 5, 2021, Ontario corporations will no longer be required to have at least 25% of their directors be resident in Canada.

  • June 25, 2021

Will Bill C-208 reduce tax on inter-generational business transfers?

Bill C-208 proposes changes to the tax treatment of inter-generational transfers of farm, fishing and small business corporations.

  • June 09, 2021

Global Minimum Tax Agreement reached by G7

Building off OECD’s Pillars One and Two, the G7 leaders agreed to global tax reform measures targeting large international companies.

  • June 07, 2021