Written by Chris Arsenault, CPA, CA, Senior Tax Manager, MRSB Chartered Professional Accountants Inc.
Bill C-208 was a private members bill that was passed in June of 2021. It was introduced to allow similar tax treatment on intergenerational family transfers of Canadian Controlled Private Corporations (CCPC) as an arm’s-length sale. Before C-208, if you sold a company to an arm’s-length company, the gain was taxed as a capital gain. However, if you sold a company to a company controlled by certain relatives, the gain was recharacterized and taxed as a dividend.
Almost immediately, the federal Department of Finance expressed concern that the amendments resulting from C-208 did not contain sufficient safeguards and could be used for purposes other than facilitating genuine intergenerational business transfers. The Department of Finance had concern that C-208 could be used to inappropriately extract corporate surplus (normally tax as dividends) at capital gains tax rates, generally referred to in the tax community as “surplus stripping”. This could result in tax free extraction of surplus if C-208 was used in combination with the lifetime capital gains deduction.
The 2023 Budget addressed these concerns by proposing two intergenerational transfer options that would be exempt from dividend recharacterization. Both transfer options continue to be limited to transfers of shares of a “qualified small business corporation” (“QSBC”) or a “share of the capital stock of a family farm and fishing corporation” (“QFFP”) as defined in the Income Tax Act. The list of “children” who will qualify for the relieving rules was also expanded to children, grandchildren, step-children, children-in-law, nieces and nephews, and grandnieces and grandnephews.
There were two transfer options proposed: Immediate Business Transfer or the Gradual Business Transfer. Each option has its own characteristics which are summarized below:
Immediate Business Transfer
Gradual Business Transfer
|1) Transfer of Control of the Business||Parents immediately and permanently transfer both legal and factual control* of the company (including a majority of voting shares), and the remaining balance of voting shares is to be transferred within 36 months.||Parents immediately and permanently transfer only legal control*, including an immediate transfer of a majority of voting shares (no transfer of factual control), and a transfer of the balance of voting shares within 36 months.|
|2) Transfer of Economic Interests||Parents immediately transfer a majority of the common growth shares, and transfer the balance of common growth shares within 36 months||Parents immediately transfer a majority of the common growth shares, and transfer the balance of common growth shares within 36 months. In addition, within 10 years of the initial sale, parents reduce the value of their economic interests in the business to:|
|3) Transfer of Management of the Business||Parents transfer management of the business to their “child(ren)” within a reasonable time based on the particular circumstances. (Generally limited to 36 months.)||Parents transfer management of the business to their “children” within a reasonable time based on the particular circumstances. (Generally limited to 60 months.)|
|4) Child Retains Control of the Business||“Child(ren)” retains legal (not factual) control for a 36-month period following the share transfer.||“Child(ren)” retains legal (not factual) control for the greater of 60 months or until the business transfer is completed.|
|5) Child Works in the Business||At least one “child” remains actively involved in the business for the 36-month period following the share transfer.||At least one “child” remains actively involved in the business for the greater of 60 months or until the business transfer is completed.|
Figure 1 Canadian Federal 2023 Budget Tax Measures: Supplementary Information – Page 18
These budget changes are proposed to apply to transactions that occur on or after January 1, 2024. Taxpayers considering an intergenerational business transition may choose to complete the transaction under the existing C-208 rules before the end of 2023 if the proposed amendments are too restrictive
*Legal control generally means the right to elect a majority of the directors of a corporation. Factual control means economic and other influence that allows for effective control of a corporation (for example, economic dependence on a person who also acts as the controlling mind)