Amendments to Clarify Potential Bill C-208 Loopholes

Beth Graddon & Marco Iampieri B.A., JD, M.B.A.

Private member’s Bill C-208 received Royal Assent on June 30.  It aligned the tax treatment of intergenerational transfers of family businesses, farms and fisheries with sales to unrelated parties.  However, the federal government attempted to circumvent Royal Assent and postpone implementation of the bill.  On July 19, a Finance Canada news release clarified it will respect the spirit of the law passed on June 30, but will introduce draft legislation for amendments to it.  The government is also intending to bring forward draft legislative amendments to the Income Tax Act with an opportunity for consultation, which will then be introduced in a bill and apply a of either November 1, 2021 or the date of publication of the final draft legislation – whichever comes later.

Finance Canada wishes to ensure there are no unintended tax avoidance loopholes created by Bill C-208, particularly when it comes to the potential opportunity for “surplus stripping” by those hoping to take advantage of the lower tax rate through the conversion of dividends to capital gains, without a genuine business transfer taking place.

The government has released a list of the issues the amendments to Bill C-208 would address:

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

These amendments will be discussed at the November 10 CES Summit on Year End Tax Planning for Corporate Owner-Managers.

Backdrop:  Recall, Bill C-208, brought forward by Manitoba MP Larry Maguire, amends the Income Tax Act to exclude transfers of qualified small business corporation shares and shares of capital stock of a family farm or fishing (within the meaning of subsection 110.6(1)) corporation to an adult child or grandchild from the anti-avoidance rule of section 84.1. Section 84.1 may result in the proceeds from the sale being treated as a dividend, whereas such proceeds would receive capital gains treatment if the shares were sold to an arm’s length party .

Bill C-208 also amends section 55 to enable intergenerational transfers under a related party exception. Section 55 is meant to prevent the tax-free transfer of intercorporate dividends when the dividend amount exceeds the corporation’s safe income on hand. The amendments to section 55 deems siblings to be related and the anti-avoidance provisions of section 55 do not apply if the corporation involved in the corporate restructuring is a qualified small business corporation share or a share of the family farm or fishing corporation.

What this means, in applicable situations, is that an individual who sells shares to a corporation controlled by children or grandchildren over the age of 19 will benefit from capital gains treatment, including the lifetime capital gains exemption. However, it is required the shares are kept by the purchasing corporation for at least 60 months and the family member must truly have control of the company.

In short, siblings are deemed not to be dealing at arm’s length and to be related, and that, under certain conditions, the transfer of those shares by a taxpayer to the taxpayer’s child or grandchild who is 18 years of age or older is to be excluded from the anti-avoidance rule of section 84.‍1.

Those rules can prevent the claiming of the Lifetime Capital Gains Exemption (LCGE) on the sale of a qualifying business to a corporation controlled by family members, or Increase the after-tax cost when the LCGE is claimed. 

It’s not the first-time amendments to this bill have been requested, with a history that dates back to 2015 and in particular the contentious rules contained in the July 18, 2017 corporate tax reforms to family income and asset splitting.

On July 19, 2021 the Canadian Finance Minister stated that Bill C-208 is law and that forthcoming amendments are intended to make sure that it facilitates genuine intergenerational transfers and is not used for artificial tax planning purposes.

The government proposes to introduce legislation to clarify that these amendments would apply at the beginning of the next taxation year, starting on January 1, 2022. As of now, the bill does not include an application date. 

These amendments will be discussed in greater detail at the November CE Summits.  Enrol now!

Additional educational resources: Stay up to speed on the tax changes affecting Canadian business owners as an MFA™-Business Services Specialist