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.