Bill C-208, an Act to amend the Income Tax Act receives Royal Assent

Bill C-208, an Act to amend the Income Tax Act receives Royal Assent

Categories: Taxation

Date: June 30, 2021

Bill C-208 was granted Royal Assent on Tuesday, June 29th and has succeeded in amending the Income Tax Act (ITA). The bill is an attempt to provide tax relief to families who wish to transfer shares of small businesses or family farm and fishing corporations to their children. However, there are concerns with the language of the bill that will likely need to be addressed as the legislation may not work as intended.

The following is a summary of the two primary amendments made to the ITA that impact these types of transactions.

1. Changes to Section 84.1

Section 84.1 of the ITA made it difficult for children to use a corporation to buy shares of a small business, family farm, or fishing corporation from their parents, when their parents wanted to claim the lifetime capital gains exemption on the sale of shares. Parents selling the shares to an arm’s length (unrelated) corporation were able to use the capital gains exemption to reduce the income tax on the resulting capital gain on the transaction. However, if the shares were sold to a non-arm’s length (related) corporation, such as a corporation owned by the parent’s children, for cash or a promissory note, the parents would not have a capital gain and could not use the capital gains exemption. This could result in significant income tax consequences.

The new rules attempt to level the playing field and to alleviate this problem by allowing a sale to non-arm’s length purchasers of the shares to result in a capital gain and the ability to use the capital gains exemption to reduce the income tax.

The new rules will require that the purchaser corporation is controlled by one or more children or grandchildren, aged 18 or older, of the vendor and the purchaser corporation does not dispose of the purchased shares within 60 months of the purchase. An independent assessment of the fair market value of the shares must be provided to the Canada Revenue Agency, together with an affidavit signed by the vendor and a third party attesting to the disposal of the shares.

The vendor’s ability to claim the lifetime capital gains exemption on the sale of shares will be reduced if the company being sold has taxable capital employed in Canada exceeding $10 million, calculated on an associated group basis (with the ability to claim the capital gains exemption being completely eliminated once taxable capital exceeds $15 million). This is an attempt to ensure the relief only applies to small businesses.

2. Changes to Section 55

Section 55 is a rule in the ITA that prevents the conversion of what would be taxable capital gain into a tax-free intercorporate dividend. Relief is allowed for certain corporate reorganizations that assist in the transition of business or family farm or fishing assets between family members. This relief was not allowed for transactions that involved siblings as they were deemed not to be related for purpose of these rules.

Bill C-208 allows for siblings to be related for purposes of these rules. This should allow certain corporate reorganizations involving shareholders who are siblings to be accomplished more easily.


Bill C-208 is welcome news for families who may be transferring their family business to the next generation. However, the bill did not have the support of the Department of Finance. There are also concerns with the wording of the legislation and this may have implications on whether the rules apply to transactions as intended. Additional changes to these revised rules may be needed in order to address these concerns.

Contact your BDO Tax advisor to discuss how these changes could impact you and your business.