Update: On June 23, 2021, the Senate of Canada passed Bill C-208 without amendment. The final formal step is for the Bill to receive Royal Assent, at which point the amendments will become law and the planning opportunities discussed below will become available. If you are considering a reorganization that would involve an intergenerational transfer of shares, MLT Aikins would be pleased to provide recommendations on the new transaction structures that may now be available.

Parliament has passed legislation which will provide for greater flexibility and planning opportunities for tax-free intergenerational transfers of shares of qualified small business corporations and family farm or fishing corporations.

On May 12, 2021, the federal House of Commons passed Bill C-208, a private member's bill that amends paragraph 55(5)(e) and section 84.1 of the Income Tax Act  (Canada) (the "Act").  The amendments increase the options available to tax professionals who are assisting clients with intergenerational transfers of shares of a qualified small business corporation, or a family farm or fishing corporation ("Qualifying Shares"). The Senate of Canada passed Bill C-208 without amendment on June 23, 2021.

Amendment: Paragraph 55(5)(e)

In certain circumstances, subsection 55(2) of the Act will recharacterize transactions which would usually be treated as dividends as taxable capital gains. Corporations can avoid this recharacterization if they satisfy the rules set out in paragraph 55(3)(a) of the Act. In order for the rules to apply, no "unrelated person" can be involved in the re-organization transaction or series of transactions. An issue may arise, however, if siblings are involved, as paragraph 55(5)(e) of the Act deems siblings to be unrelated for the purposes of section 55.

Bill C-208 amends paragraph 55(5)(e) of Act so that the rule that deems siblings to be unrelated would not apply where the re-organization involves a qualified small business corporation or a family farm or fishing corporation ("Qualifying Corporations").

Under the amendments, dividends paid or received by Qualifying Corporations in which siblings have an ownership interest would fall within the exception set out in paragraph 55(3)(a) of the Act.

This gives tax practitioners greater flexibility, for example, in situations where a parent desires to transfer the assets of a Qualifying Corporation to corporations owned by their individual children on a tax-deferred basis.

Proposed Amendment: Section 84.1

Section 84.1 of the Act prevents an individual shareholder from accessing corporate surplus, which may otherwise be paid out as a tax-free return of capital, in a sale of shares to a corporation with whom the transferor does not deal at arm's length (for example, a corporation owned by the transferor's child).

Bill C-208 amends section 84.1 by adding a narrow exception in paragraph 84.1(2)(e). The exception would apply where:

  1. the transferred shares are Qualifying Shares;
  2. the purchaser corporation is controlled by an adult child or grandchild of the transferor; and
  3. the purchaser corporation does not dispose of the transferred shares within 60 months of the transaction.

In these circumstances, the purchaser corporation and the transferor would be deemed to be dealing at arm's length so section 84.1 should not apply to the disposition. 

This change puts a narrow category of non-arm's length transactions on equal footing from a tax perspective with transactions that occur between arm's length parties. For example, an individual who owns Qualifying Shares that qualify for the lifetime capital gains exemption may be able to access the proceeds of disposition of the Qualifying Shares on a tax-free basis if they dispose of the Qualifying Shares to their child's corporation (just like they would be able to do if they disposed of the Qualifying Shares to an arm's length third party).

Now that Bill C-208 has been passed by both the House of Commons and the Senate, the changes to the Act will come into force once the bill receives Royal Assent. A member of the MLT Aikins taxation group would be pleased to review your situation and provide our recommendations on the impact of Bill C-208 on the planning options available for your intergenerational transfer of the shares of small business and family and fishing corporations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.