Summary of the Bill C-208 Rules coming into place for transfers effective January 1, 2024

Written by Trista Gallant, CPA, CA

As proposed in Budget 2023 (further revised August 4, 2023) and where conditions are met and an election is made, the business transfer between a parent and a corporation controlled by a child is excluded from the Section 84.1 deemed dividend rules. The original Bill C-208 rules introduced in 2021 have now become much more complex with rigorous requirements intended to reflect a more genuine intergenerational transfer of a business applicable to transactions dated January 1, 2024, and later.

Two options: 

1. Immediate business transfer (within 36 months) (“IBT”)
2. Gradual business transfer (5-10 years) (“GBT”)

Conditions applicable for either option IBT or GBT: *marks differences between the two options

1. Vendor must be an individual
2. Shares sold must be QSBC or QFP shares at the time of transfer (“Subjectco”)
3. One or more children have dejure control over the purchaser corporation (“Purchaseco”)
4. Vendor alone or with spouse has dejure AND defacto control of the subject corporation.
5. Transfer of control: *
   a. Majority of voting shares held by vendor and spouse combined must be transferred immediately.
   b. Within 36 months they can no longer own any voting shares

   *Under IBT – dejure AND defacto control and under GBT – only dejure control.

6. Transfer of economic interests: *
   a. Majority of growth shares need to be transferred immediately.
   b. Within 36 months no growth shares owned by vendor or spouse.

   *Total debt and equity interests in all companies (Subjectco, Purchaserco and Related Group Entities) must be less than 30% (QSBC) or 50% (QFP) before 10 years under the GBT (the moment the interest is reduced to the appropriate percentage is the “final sale time”)

7. Transfer of management: *
   a. *Within 36 months under IBT (or reasonable longer period) to transfer management and permanently cease to manage
   b. *Within 36 months under GBT (or reasonable longer period) to transfer management and permanently cease to manage
8. Child retains legal control over the Subjectco and Purchaseco
   a. At least 3 years for IBT
   b. Later of 5 years/until sale complete for GBT
9. Child remain active in the business
   a. At least 3 years for IBT
   b. Later of 5 years/until sale complete for GBT

Other considerations:

• The normal reassessment period of the Vendor is extended by three years for IBT and ten years for GBT to allow CRA to assess whether the requirements have been met.
• The parent transferor and each adult child transferee must jointly elect in prescribed form (due by parent’s tax filing deadline for the year of the transfer).
• The child will be jointly and severally liable for any additional taxes payable by the parent if the transfer doesn’t meet the conditions.
• The parent can claim a reserve up to ten years (rather than the usual five).
• Definition of child (as defined in subsection 70(10) is not extended to include niece and nephew and grandniece and grandnephew and spouses of the forementioned.
• No valuation is “required” however one is still realistically necessary under GBT to ensure that the appropriate percentage of debt and equity has been disposed of within the designated time limit.
• There are some relieving provisions available for a sale to arm’s length parties of all shares of the related group entities by the child and if the assets of the business are sold in order to pay the liabilities of the business.
• There is a 36 month “safe harbour” regarding the transfer of management and additional relieving provisions for a child that can no longer be actively involved in the business due to their death or an impairment in their functions.
• CRA has provided an interpretation that “management” refers to the direction or supervision of business activities but does not include the provision of advice. This would suggest the Vendor is still able to provide advice even though they have relinquished their management activities in respect of the business.
• The business (all of the related businesses of the subject corporation and relevant group entity) needs to be carried on as an active business and at have at least one active child involved on a regular continuous and substantial basis in a related business (20 hours per week or more on average while the business operates (same as TOSI test for excluded business).
• Vendor required to sell all shares of the subject corporation and any relevant group entities in a single transaction. Later transactions selling additional shares may be subject to 84.1(1) deemed dividend rules.
• Vendor and spouse allowed to control the Subjectco together prior to the sale (ie. Vendor doesn’t have to control Subjectco alone)
• No person other than the Vendor and their spouse is allowed to have dejure or defacto control at the time of the transaction, which can cause issues in utilizing the provisions in situations where multiple family members share control. It is my understanding that the subject corporation can be a clean holdco that only owns shares of a related business entity. The subjectco would have to own more than 10% of the votes and value of the related business entity, and the child would need to be actively engaged on a regular and continuous basis in the activities of the business carried on by the related business entity.

Intergenerational transfers of businesses are complex to begin with and meeting the stringent conditions required to fall into the exception to 84.1(1) provided by Bill C-208 can be difficult to accomplish. As a result of these new comprehensive rules, it is important that advisors understand the conditions required sufficiently to allow them to plan appropriately to avoid any potential complications.