Bill C-208: Intergenerational Business Transfers

On June 29, 2021, Bill C-208 was granted Royal Assent and became law in Canada.  Bill C-208 amended the Income Tax Act (Canada) (the “Act”) to provide tax relief to families wishing to transfer shares of small business corporations, family farms, or fishing corporations to the next generation: their children and grandchildren.

Ordinarily, the Act provides that sales of small business corporation shares result in a capital gain, of which 50% is a taxable capital gain and included in the income of the seller and taxed at ordinary marginal rates.  Accordingly, a corporate business owner may seek to sell his or her shares of a corporation and realize a capital gain. But, before the introduction of Bill C-208, when a parent wished to sell his or her shares of a business to a family member’s corporation (i.e., a non-arm’s length child or grandchild’s holding company) what would normally be a capital gain was recharacterized as a dividend, and taxed at higher dividend tax rates, due to the application of an anti-avoidance rule in the Act.  Depending on the province in Canada, this resulted in an additional tax burden of over 20%.

Before the introduction of Bill C-208, the alternatives available for parents were a third-party (or “arm’s length sale”), or a disposition of the business assets directly to the child or grandchild; not always an acceptable option for a parent wishing to transition his or her business to a child or grandchild.

Bill C-208 attempts to exempt certain intergenerational transfers from the anti-avoidance rule described above by allowing for sales of shares of a small business corporation, family farm, or fishing corporation, where certain conditions are met.  In order for a parent to receive capital gains treatment on his or her sales of shares to a child or grandchild’s corporation, rather than have those proceeds recharacterized as dividends, the shares of the small business corporation must qualify as a “Qualified Small Business Corporation,” a family farm or fishing corporation.  A proper and independent valuation of the corporation must be undertaken in advance of the sale, and the corporation purchasing the shares must be controlled by the parent’s child(ren) or grandchild(ren), and must not dispose of the shares within 60 months of acquiring them (for any reason other than death).

In a press release earlier this summer, the Department of Finance acknowledged that Bill C-208 is law and indicated that legislative amendments would be forthcoming to make sure that provisions of the Act facilitate genuine intergenerational transfers and are not used instead for “surplus stripping” or artificial tax planning.  These amendments will be brought forward for consultation and, once completed, will apply either November 1, 2021 or the date of publication of the final draft of the legislation, whichever is later.

If you have any questions or would like further information, please contact Jennifer C. Leve in the Toronto, Canada office of Dickinson Wright at 416-777-4043.

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About the Author:

Jennifer Leve is a Partner with Dickinson Wright’s Tax Group. She can be reached at 416-777-4043 or, and her biography can be accessed here.

The SALT Cap and State Taxation of Pass-Through Entities

Among the many significant changes in the 2017 Tax Cut and Jobs Act (TCJA), individual taxpayers’ deductions for state and local taxes (SALT deductions) on federal Form 1040 Schedule A were capped at $10,000 ($5,000 for married taxpayers filing separately).  The “SALT cap” results in reduced itemized tax deductions for individual taxpayers, particularly impacting homeowners paying property taxes on their residences and wage and income earners subject to state and local income taxes.

Of course, the expanded “standard deduction” benefitted many taxpayers, but possibly did not produce enough of a net benefit, particularly for taxpayers residing or working in high tax states.

In the aftermath of TCJA, several states immediately began looking at ways that would provide a workaround to avoid the federal return SALT cap limitation.

To date, over a dozen states have changed their tax laws to replace the state income taxation of individuals on their business income (subject to the SALT cap) with a corresponding income tax imposed on pass-through business entities (i.e., partnerships, limited liability companies taxed as partnerships and S corporations), which tax is paid and deducted at the entity level and therefore not subject to the SALT cap.

The Internal Revenue Service effectively sanctioned the workaround, for appropriately designed pass-through entity (PTE) taxes, in IRS Notice 2020-75.

As always, tax laws vary in each state following their specific statutes. Relevant provisions include:

  • Whether the PTE tax in a state is elective (most states) or mandatory (e.g., Connecticut);
  • When the election is made (and whether it may be revoked); and
  • Whether or when estimated PTE taxes must be paid, among other issues.

Most importantly, taxpayers must carefully determine whether the federal after-tax benefit outweighs the specific state PTE tax (a PTE tax might be imposed at the highest income tax marginal rate or deny a partner’s or S shareholder owner’s unreimbursed business expenses).

Finally, most states provide that their PTE tax is not available when the federal SALT cap sunsets under the TCJA in 2025 or if the federal tax laws are changed before 2026, which may increasingly become a possibility, further complicating business owners’ tax planning and compliance.

For more information, please contact Tom Hammerschmidt in the firm’s Ann Arbor office at 734-623-1602, or any of the firm’s tax specialists located in our Dickinson Wright U.S. offices.

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About the Author:

Tom Hammerschmidt is a Member with Dickinson Wright’s Tax Group. He can be reached at 734-623-1602 or, and his biography can be accessed here.