Amendments to Bill C-208: Opportunities and new restrictions for intergenerational business transfers

By Ashley Kim
Nov 21, 2023
Photo credit: Edwin Tan/iStock/Getty Images

Before Bill C-208 came into effect on June 29, 2021, owners of a small business corporation, a family farm, or a fishing corporation were penalized when they sold or transferred shares to their child through a corporation owned or controlled by the child. The anti-avoidance rule in section 84.1 of Canada’s Income Tax Act (the ITA) recharacterizes capital gains as taxable dividends if taxpayers receive non-share consideration, such as cash or a promissory note for the proceeds of their shares to a non-arm’s length (related) corporation. Due to this recharacterization, section 84.1 not only subjects taxpayers to higher taxes (taxable dividends are subject to a higher tax rate than capital gains), but it also eliminates the opportunity for taxpayers to claim their lifetime capital gains exemption (LCGE) on the sale of their shares.

To encourage genuine intergenerational business transfers, Private-Member’s Bill C-2081 was introduced in 2021. Under the terms of this bill, which received royal assent and became law on June 29, 2021, if certain conditions are met, a transaction will not be subject to section 84.1,2 and the individual taxpayer will pay tax at the lower capital gains rate. If the taxpayer has sufficient LCGE and is not subject to other taxes, such as alternative minimum tax, there may be no tax on the transaction.

On July 19, 2021, however, the Department of Finance announced that it planned to amend Bill C-208 to safeguard against certain unintended tax avoidance loopholes—such as “surplus stripping” where there is no genuine intergenerational transfer of business3—and provided an illustrative list of issues with Bill C-208.

The proposed amendments to Bill C-208, which were announced in Budget 2023, are more restrictive and would apply to transactions on or after January 1, 2024. Given the potential impact of these changes, taxpayers looking to make business succession arrangements should pay heed if they want to avoid triggering unexpected tax consequences.

To help, this article provides a general overview of both Bill C-208 and the proposed amendments. However, due to the complexity of the current and proposed rules, the proposed rules are presented in a simplified manner.

Bill C-208

The general conditions under which the relieving provisions of Bill C-208 apply can be summarized as follows:

  • A taxpayer must be resident in Canada (not a corporation);
  • The taxpayer disposes shares (“subject shares”) of a corporation (“subject corporation”), which is resident in Canada;
  • The subject shares are qualified small business corporation (QSBC) shares  or shares of a family farm or fishing corporation (FFFC)4;
  • The taxpayer disposes of these shares to another corporation (“purchaser corporation”), and the purchaser corporation is controlled by one or more of the taxpayer’s children or grandchildren who are 18 years of age or older; and
  • The purchaser corporation does not dispose of the subject shares within 60 months of their purchase.

The provisions include a rule intended to reduce the LCGE of the taxpayer where the subject corporation’s taxable capital employed in Canada (TCEC) is greater than $10 million; it is also intended to eliminate the LCGE if the TCEC is greater than $15 million.5 However, this reduction to the capital gains exemption may not be effective due to concerns with the language used in the legislation.

In addition, there is a requirement that the taxpayer provide an independent assessment of the fair market value of the subject shares, as well as an affidavit signed by the taxpayer and a third party attesting to the shares’ disposal.

Proposed amendments

As outlined in Budget 2023, the proposed rules put more restrictions or conditions on a parent and an adult child to ensure that the exception6 to section 84.1 is only applied in the case of a “genuine” intergenerational business transfer. The amendments focus mainly on the transfer of control and ownership from a parent to their adult child and on conditions that must be met by the child after the transfer is made. These conditions include maintaining control of the purchaser corporation until a specific time and engaging in the underlying active business.

It’s important to note that the meaning of “child” has been extended under the proposed rules to include a child’s spouse even after the child’s death.7 It has also been extended to include a niece or nephew of a taxpayer or taxpayer’s spouse, the spouse of a niece or nephew, and the children of a niece or nephew. This extended meaning would enable more taxpayers to take advantage of the exception rule.

Additionally, in supplementary information to Budget 2023, the Department of Finance noted that the proposed amendments are also intended to remedy the fact that Bill C-208 does not address:

  • The parent’s control in the underlying business of the corporation;
  • The child’s involvement in the business;
  • Whether the interest in the purchaser corporation held by the child continues to have value; and
  • Whether the child retains an interest in the business after the transfer.8

Under the 2023 budget proposals, there are two paths to achieving an acceptable intergenerational transfer of qualifying shares: 1) an immediate intergenerational business transfer, which must be completed within three years; and 2) a gradual intergenerational business transfer, which can be completed over a period of five to 10 years. Most of the conditions for these two paths are similar except for the transitioning period and a few distinctive characteristics, as discussed below.


The proposed rules would apply where a parent resides in Canada and sells QSBC or FFFC shares to a corporation controlled by their adult child (where the expanded definition of child applies, as described earlier). Under these rules, the taxpayer (parent) would have to be an individual, not a trust; this means that a trust could not be used to multiply the LCGE among family members, and the parent would have to control the subject corporation prior to sale.9

Additionally, the parent must not have previously sought an exemption pursuant to paragraph 84.1(2)(e) of the ITA. This is meant to prevent a parent from undertaking successive transfers of shares that derive value from the same active business.

The disposition of shares

Under the proposed amendments, the following conditions would have to be met on and after the transfer:

Transfer of control and ownership

At the time of disposition, the parent would have to give up control of the subject corporation, the purchaser corporation, or any other person or partnership (referred to as a “relevant group entity”) that carries on an active business that is relevant to the determination of whether subject shares qualify as QSBC or FFFC shares.

In an immediate transfer, both legal and factual control would have to be transferred to the child. In a gradual transfer, only legal control would have to be transferred. However, in explanatory notes to Budget 2023, the Department of Finance stated10 that taxpayers should not rely on the ITA to justify any remaining factual control by the parent.

In both types of transfers, the parents would also be prohibited from owning, directly and indirectly, more than 50% of voting common shares of the subject corporation or more than 50% of equity interest in the relevant group entity, except with regard to any non-voting preferred shares, after the disposition.

Transfer of remaining ownership

In both immediate and gradual transfers, the parent would have to dispose of the remaining balance of their common growth shares in the subject corporation and any equity interest in a relevant group entity, excluding non-voting preferred shares, within 36 months of the disposition.

In an immediate transfer, the parent could hold the non-voting preferred shares or any debts indefinitely. In a gradual transfer, however, the parent could not—within 10 years of the initial disposition time—own, directly or indirectly, an interest (debt or equity) that is equal to more than 50% of the value of their interest in an FFFC at the time of disposition; for a QSBC, the number drops to 30%.

Transfer of management

The parent would have to transfer management of the business to at least one child and permanently stop managing the subject corporation and any relevant group entity within 36 months of an immediate transfer (or a greater period of time as is reasonable in the circumstances). In the case of a gradual transfer, it would increase to 60 months (or a greater period of time as is reasonable in the circumstances).

Child’s control and involvement

In an immediate transfer, the child would have to retain control of the subject or purchaser corporation for 36 months. In a gradual transfer, the time period extends to a minimum of 60 months (or until the business transfer is completed).

The child (or at least one of the children) must be actively engaged in the business on a regular, continuous, and substantial basis.11 This would require the child to work a minimum of 20 hours per week.

Relieving provisions

Even though the child would have to meet multiple conditions after the transfer of business, the proposed rules provide relief in certain circumstances without triggering any negative tax consequences. These include circumstances in which the child:

  • Subsequently disposes of the shares to an arm’s-length party or to another child;
  • Cannot carry on the business due to physical or mental impairment or death; and
  • Disposes of all business assets to satisfy debts to the business’s creditors.

Exercise caution

These are just some of the issues to bear in mind when contemplating the potential impact of the amendments to Bill C-208. It is currently unclear whether all genuine family business succession undertakings would be able to meet the conditions proposed in these amendments. Therefore, to avoid incurring severe tax consequences, it is important for taxpayers to understand the restrictions and conditions that would have to be met by both parent(s) and child(ren).


Ashley Kim, CPA, is a tax manager in Canadian tax services for BDO Canada LLP in Vancouver, where she focuses primarily on estate planning for high-net-worth individuals, corporate reorganizations, and sales of businesses for private corporations. She thanks Tina Huang, CPA, CA, TEP, a tax partner at BDO, for her assistance with this article. This article was originally published in the November/December 2023 issue of CPABC in Focus.


2 Pursuant to paragraph 84.1(2)(e) of the ITA.

3 Rudy Mezzetta, “Budget 2023 Shuts Down Loopholes Left in Bill C-208,” Advisor’s Edge, March 28, 2023.

4 Within the meaning of subsection 110.6(1) of the ITA.

5 Pursuant to paragraph 84.1(3)(b) of the ITA.

6 Pursuant to paragraph 84.1(2)(e) of the ITA.

7 This is the same meaning as in subsection 70(1) of the ITA.

8 Department of Finance Canada, Budget 2023 – Tax Measures: Supplementary Information, March 28, 2023 (16).

9 Pursuant to paragraph 84.1(2.3)(b) of the ITA.

11 Within the meaning of paragraph 120.4(1.1)(a) of the ITA.

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