On June 29, 2021 Bill C-208, which will significantly impact intergenerational transfers of businesses, received Royal Assent.
What does it do?
This Bill was intended to facilitate intergenerational transfers of qualified small business corporation shares (QSBC) and shares of the capital stock of a family farm or fishing corporation (both defined in Subsection 110.6(1)), by excluding these transfers to a corporation controlled by a taxpayer’s child or grandchild 18 years of age or older from the anti-avoidance rule in Section 84.1. Section 84.1 can deem an individual who transfers shares of a corporation in which they have a significant interest to a non-arm’s length corporation, to receive a dividend as opposed to a capital gain.
To benefit from the proposals, Bill C-208 would require that the taxpayer must provide the Minister with an independent assessment of the fair market value of the subject shares and an affidavit signed by the taxpayer and by a third party attesting to the disposal of the shares.
In addition, other than in the case of death, where the purchaser corporation disposes of the subject shares within 60 months of their purchase, special rules apply. In this case, the original vendor would be deemed to have disposed of the shares to the person who acquired them from the purchaser corporation (which, depending on the relationship with this person, may or may not cause a Section 84.1 issue). The 60-month period would still be deemed to have commenced when the taxpayer originally disposed of the shares to the purchaser corporation.
This Bill would also reduce the limitations on the transfer of business assets between corporations owned by siblings. Currently, siblings are deemed not to be related for the purposes of Section 55 and therefore, should siblings that are co-owners wish to part ways and separate the business on a tax-deferred basis, they will need to undertake a potentially complex butterfly reorganization (Paragraph 55(3)(b)). This Bill would still deem siblings to not be related for these purposes. However, it would add an exception such that siblings would not be deemed be unrelated (that is, they are related for this purpose) where a dividend was received or paid in a series of transactions by a QSBC or family farm or fishing corporation (defined in Subsection 110.6(1)). This will allow for a simpler reorganization between siblings (Paragraph 55(3)(a)).
When is it effective?
Bills that do not indicate a coming into force date become effective at the end of the day immediately before Royal Assent was obtained (Paragraph 6(2)(a) of the Interpretation Act). As no coming into force date was included in the Bill, it appeared that it would have been effective June 29, 2021.
However, on June 30, 2021 the Department of Finance issued a news release indicating that legislation would be introduced to clarify that the amendments will become effective on January 1, 2022. This means that, while the changes are currently technically law, changes will be made which will eliminate the benefits of these provisions for any who undertook transactions to access them prior to January 1, 2022.
Further changes to the legislation?
The June 30, 2021 release also included the phrase “[t]he federal government is committed to facilitating genuine intergenerational share transfers, while preventing tax avoidance that undermines the equity of Canada’s tax system.” Many practitioners have postulated that the combination of this phrase with the delay in effective date is an indication that further changes may be coming to adjust or modify the legislation. There have been concerns expressed that, especially since the Bill was not drafted by the Department of Finance, there may be technical glitches, and that the breadth of the wording may allow transactions that were not intended.
Video Tax News will be monitoring for any developments on this topic. Monthly Tax Update subscribers may wish to review articles in issues 464(9) and 411(9) for more information on how Section 84.1 works.
We will be covering whatever new details arise, and planning possibilities, in our fall Tax Update 2021 seminar series.