Bill C-208 opens the door to new tax-planning opportunities for family businesses

By Tina Huang
Nov 19, 2021
Photo credit: archivector/iStock/Getty Images

Succession planning is an important consideration for the founders and owners of family businesses, and the tax strategies available for selling shares to and purchasing shares from a third party versus a related party can vary significantly. In particular, there are various provisions in the Income Tax Act (ITA) that limit the tax advantages for an intergenerational transfer of shares within a family.

Bill C-2081 is intended to give families more flexibility to access certain tax advantages to facilitate intergenerational transfers of shares of small family businesses. Although it received royal assent on June 29, 2021, the Department of Finance issued a press release the following day indicating its intention to delay the bill’s effective date to January 1, 2022. On July 19, however, the department issued another announcement—this time confirming that Bill C-208 did, in fact, become law on June 29. Further, it announced it would soon be issuing a proposal to amend the existing bill, with the proposed changes only becoming effective on November 1, 2021, or on the date the final draft legislation is released—whichever is later.

This article reviews the general tax implications of intergenerational transfers before and after the passage of Bill C-208. It also addresses concerns and uncertainties about the changes the Department of Finance is expected to propose on or after November 1, 2021, and explains how these proposed changes could affect your succession planning.

Before and after Bill C-208

When individual purchasers and sellers of a small business, family farm, or fishing corporation are unrelated or operating at arm’s length, they generally have two tax advantages available to them:

  • For the vendor: Each individual vendor has a lifetime capital gains exemption of up to $892,2182 (or $1 million for qualified farm or fishing property) available to shelter the gains realized on the sale of the shares, provided the shares meet specific criteria in the ITA.3
  • For the purchaser: Purchasers can buy the shares using a corporation, which means they can use corporate funds to pay for the shares.

This creates a win-win situation in which both vendors and purchasers can realize some tax benefit from the transaction.

This type of arrangement does not produce the same tax results when the purchasers and sellers are not operating at arm’s length. A common scenario is when an adult child uses a corporation to purchase the shares of a business from their parents with cash or a promissory note. Before the introduction of Bill C-208, this type of transaction would result in significant negative tax implications, with the parents unable to use their lifetime capital gains exemption to shelter any capital gains—instead, they would be deemed to have received a dividend, which is subject to higher tax rates than capital gains. Accordingly, tax professionals generally did not recommend this type of strategy in an intergenerational transfer transaction.

Under Bill C-208, however, parents are now able to claim the capital gains exemption in the scenario described above, because the purchaser and the seller of the shares are deemed to be at arm’s length, provided all of the following criteria are met:4

  • The shares sold are qualified small business corporation shares or shares of a family farm or fishing corporation;
  • The purchaser corporation is controlled by one or more children or grandchildren, aged 18 or older;
  • The purchaser corporation cannot dispose of the purchased shares within 60 months of the purchase; and
  • The taxable capital employed in Canada cannot exceed $10 million without a reduction to the lifetime capital gains exemption available (the ability to claim any exemption is eliminated when taxable capital exceeds $15 million).

Another advantage introduced by Bill C-208 is that it allows for additional flexibility for a corporate group to undergo certain reorganizations to split the family business or certain assets among siblings on a tax-deferred basis.5

Concerns raised by the Department of Finance

The new amendments in Bill C-208 allow a child, through their own corporation, to purchase a portion or all of the shares of a private corporation from their parents and have this transaction deemed to be at arm’s length. The purchase of the shares does not need to result in the passing of control of the business to the child; instead, only the purchaser corporation needs to be controlled by the child. Moreover, the parents can claim lifetime capital gains exemption on the sale of the shares and do not have to pay any personal taxes from the capital gains realized to the extent that they have an available exemption limit (and assuming alternative minimum tax is not payable). The parents can then receive the proceeds from the sale through existing or future corporate surpluses generated.

Generally, when a shareholder needs to extract cash from their private corporation, the corporation will declare a dividend to the shareholder; for BC residents, this dividend may be subject to a tax rate of 48.89%.6 Using the strategy described above, however, which is commonly known as a type of “surplus strip,” parents can effectively extract corporate cash without paying any personal taxes and without there being any real intent to transfer all or part of the ownership of the business to their child. In fact, the child does not even need to be actively involved in the business. Because this type of situation does not align with the intent of Bill C-208, the Department of Finance indicated in its July 19 news release7 that it intends to introduce amendments to address the following issues:

  • 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; and
  • The level of involvement of the child or grandchild in the business after the transfer.

Uncertainty about the proposed changes

As mentioned previously, the Department of Finance has assured the public that its amendments to Bill C-208 will not come into effect before November 1, 2021, at the earliest. But does this mean taxpayers have a “safe window” in the meantime to take advantage of surplus strip planning?

The short answer is no. There are still other provisions in the ITA on which the Canada Revenue Agency (CRA) can rely to reassess a taxpayer when it believes a transaction invites higher scrutiny or does not align with the intent of Bill C-208. For example, the ITA contains general anti-avoidance rules (GAAR)8 that can be applied if transactions abuse the object, spirit, or purposes of a provision in the ITA, even if all other provisions, such as the legislation in Bill C-208, are met. We have seen the courts uphold this concept repeatedly; for example, in Canada v. Deans Knight Income Corporation,9 the Federal Court of Appeal allowed the appeal on the basis of GAAR, even though the transaction in that particular case met a well-established interpretation of the application of a specific provision in the ITA.

Explore opportunities, but carefully

Since the Department of Finance has already articulated its concerns with Bill C-208—specifically, that the bill as it currently stands may not meet the Government of Canada’s commitment to facilitating genuine intergenerational share transfers while also protecting the integrity of the tax system—any planning or transaction that does not involve a genuine intergenerational transfer of the family business may be challenged by the CRA. With that said, if there are elements of a true succession plan within a family, Bill C-208 opens a wide door of tax planning opportunities that taxpayers should take into consideration.


Tina Huang is a senior tax manager with BDO Canada LLP in Vancouver, where she specializes in personal and corporate tax planning for privately held businesses and high-net-worth individuals. She also focuses on corporate reorganizations, business purchases and sales, and estate planning.

This article was originally published in the November/December 2021 issue of CPABC in Focus.


2   Per ITA subsections 110.6(2), (2.1), and (2.3).
3   See “qualified small business corporation share” or “share of the capital stock of a family farm or fishing corporation,” as defined in subsection 110.6(1) of the ITA.
5   Per amendments to subparagraph 55(5)(e)(i) of the ITA.
6   For illustrative purposes, this example assumes the highest personal combined federal and BC marginal tax rate on non-eligible dividends.
7   Department of Finance Canada, “Government of Canada Clarifies Taxation for Intergenerational Transfers of Small Business Shares,” news release, July 19, 2021.
8   See section 245 of the ITA.

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